Transfer of directors loan account to other direct

Can husband and wife directors transfer their loan to the company to their son?

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Hi. My client is a family company. Husband and wife are the only shareholders. They are directors, as is their son, who works in the business. He is not currently a shareholder. The company owes H&W £23k. This relates to dividends declared but not actually paid, before the dividend rules changed in 2016. The H&W now wish to retire, and to gift their shares to their son, who will take over running the business. The company is not currently in a position to repay the £23k to H&W, and they do not want it to be paid to them. If we relase the company from the loan, I think it will create a tax charge of £23k at 19% = £4370. The son intends to build the business back up over time. Could the H&W transfer the benefit of the loan to their son, with the agreement of all parties? So that he is owed the £23k rather than them? For IHT purposes they would make a PET. For CGT purposes they have made a disposal, but the loan is arguably currently worthless since the company can't repay them. The company's position has not really changed, it just owes the £23k to a different person.

Have I missed anything? Can anyone see a problem with this?

Thanks

Replies (10)

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By frankfx
23rd Mar 2021 12:14

Gift, to reduce IHT risk or exposure then consider:

use £3,000 annual gift , worth £6000 if previous year £3,000 unused.

for H and W that is worth £12,000 this side of 5th April.

and £6000 ( 2* £3000 ) on 6th April.

£18,000 in next few weeks.

Also worth considering retaining services of H & W as directors perhaps , make use of income tax band 20% .

Perhaps son / family ''saving'' 32.5%,( indeed son family may have TAX Credit clawback avoided ?)
The H W salary could be recycled back to son, gift out of income !!

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Replying to frankfx:
By SteveHa
23rd Mar 2021 12:51

frankfx wrote:

The H W salary could be recycled back to son, gift out of income !!

Provided, of course, that H W are living within their income limits, which is not necessarily a given.

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paddle steamer
By DJKL
23rd Mar 2021 13:10

If son receives loan balance (worthless) but later draws on it, consider his tax position re same?

Could H & W instead convert loan to shares prior to gifting all shares to son to tidy matters?

EDIT

Given current state of company, does it have b/fwd trading losses, if so care re change of control may be needed, or maybe these give an opportunity to sell plant etc to new clean beast for son to develop, is continuing the existing company the right approach if say it has a weak balance sheet etc?

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By lizturnbull
23rd Mar 2021 15:04

Thanks for your helpful replies everyone. I'm not sure what you mean by "If son receives loan balance (worthless) but later draws on it, consider his tax position re same?" Please could you clarify?

I also thought about H&W converting loan to shares, then gifting to son. It's still an option but I was concerned as to whether HMRC would try to apply the GAAR, since they will have effectively avoided the corp tax charge which would arise if the loan was just released. Does anyone have a view on that, or done it in practice?

There are no brought forward losses so that's not a concern. There was a loss in 2019 which was carried back, and 2020 was a very small profit. I originally suggested the son set up a new co and acquire the assets, then strike old co off, but the son is looking to obtain a first mortgage in the next year or so, and mortgage company will require at least 2 years accounts, so may be better for him to keep old company going for that purpose. Had a brief chat with mortgage advisor who said that everything has changed with covid, and lenders seem to be concentrating on job security and how long someone has been employed in same job, so probably looks better for the son to stay with same company.

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Replying to lizturnbull:
paddle steamer
By DJKL
23rd Mar 2021 15:58

What value can currently reasonably be ascribed to the loan made by mum and dad to the company given company currently cannot repay it, is this less than its nominal £23,000 value?

What will son's base cost be re said loan upon gift to him of it by Mum and Dad, remembering this is a connected party transaction?

Is there a difference between the two such that if son later gets repaid this loan in full he will receive from the company more than its value when he acquired the loan?

https://www.gov.uk/government/publications/debts-and-capital-gains-tax-h...

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Replying to DJKL:
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By lizturnbull
23rd Mar 2021 21:53

Very helpful, thank you, I hadn't thought of that. The loan currently must be of little value, certainly not £23k, so if it is gifted to the son and he later improves the business such that the loan can be repaid to him, the repayments are going to be subject to CGT.

I think that perhaps the best option is for the parents to convert the loan to shares, then gift them to the son. Does anyone have an opinion on whether GAAR could apply, since they have saved corp tax by not releasing the loan? Or has anyone done this in practice?

Thanks for your help

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Replying to lizturnbull:
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By Tax Dragon
24th Mar 2021 09:41

lizturnbull wrote:

I think that perhaps the best option is for the parents to convert the loan to shares, then gift them to the son.

Why? To answer your question, I can't begin to see how GAAR could begin to be in point, but, still... why do you think that is the best option?

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Replying to Tax Dragon:
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By lizturnbull
24th Mar 2021 11:27

Because if the parents give the benefit of the loan to the son, his base cost for the loan will be next to nothing as it is currently worthless. The loan will remain on the company BS as a creditor. If he manages to turn the company around such that repayments can be made to him, he will be liable to CGT on the repayments, although he would have the benefit of his CGT annual allowance. It could take many years for the company to be able to repay any of the loan.

He wants to apply for a mortgage in the next year or so, so the accounts would look better without the loan creditor, which we can achieve if we convert the loan to shares which are then gifted to him.

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Replying to lizturnbull:
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By Tax Dragon
24th Mar 2021 12:40

So no actual CGT on the second-hand debt, as it will be repaid slowly over years, if at all. And you should move the "because" to the start of your second paragraph.

FWIW, GAAR has nothing to say about improving a balance sheet to get a mortgage, nor how daft a mortgage provider would have to be to think the would-be borrower's financials had actually been improved by such a ploy.

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