treatment of bank loan written off by bank

treatment of bank loan written off by bank

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I act for a limited company which is presently selling a property at a loss and below the level of the bank loan - ie negative equity.

The bank has indicated that they do not intend to pursue the shortfall, nor will they seek to wind up the company to recover the loss.

Question I have pondered is how to treat the written off amount of the loan. As there will be a loss on sale of the fixed asset on the P & L account, one assumes the other leg of the double entry being the credit to clear the loan account will be offset against the loss on sale as it is not the company that has lost the money on the sale of the asset rather the bank has?

Also the tax treatment - again one assumes if the above is correct treatment then the net amount is added back on the corp tax comp.

Any thoughts greatfully received

Replies (21)

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By User deleted
20th Nov 2012 22:54

No netting off

Assuming the property is held as an investment, you have a capital loss, the use of which is somewhat limited.

On the other hand, the release of the loan balance will be a taxable non-trade loan relationship credit.

 

 

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By rohit
21st Nov 2012 11:39

Losses

I think you are correct on the double entry on getting the loan off your SOFP.

Regarding tax, absolutely agree with BKD regarding the treatment.

Any capital losses can be set only against other chargeable gains arising in the same accounting period. Although these can be carried forward if unutilised. 

 

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By blok
21st Nov 2012 11:10

.

rohit

what NTLR debit are you refering to?

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Replying to AHaccountants:
By rohit
21st Nov 2012 11:28

Correction

blok wrote:

rohit

what NTLR debit are you refering to?

The one I managed to create artificially.

I am having a very bad day. Thanks for the quick observation blok. Have corrected my original post now. 

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By blok
21st Nov 2012 11:58

.

ahhh

debits and credits, sometimes they just merge into one.

 

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By hiu612
23rd Nov 2012 11:32

Common sense

How true that logic and common sense are so frequently lacking in the application of UK tax legislation. You breakeven on a single transaction involving a single property, but manage to generate a capital loss and a corresponding taxable profit, with no prospect of offsetting.

 

No wonder tax scheme providers are able to find ways to generate artificial losses without incurring actual financial losses.

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7om
By Tom 7000
23rd Nov 2012 14:58

No PGs on the loans

watch out in case there are as this can scew tax as calling in PGs are not tax deductable to the PG holders

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By wannabay
27th Nov 2012 12:34

proceed with caution

I have been looking at a similar situation albeit in a partnership/income tax context where non-recourse finance was secured on property, but am also familiar with corporate tax. I agree with BKD since the P&L treatment will determine the tax treatment under the corporate debt tax rules. This results in a capital loss but taxable income which cannot be offset.

The point I would make is that while the bank may have indicated it will not pursue the shortfall (can it or was this non-recourse) has it issued a formal deed of release, I suspect not? If it hasn't, why not leave the shortfall as a liability on the B/S, so avoiding creating taxable income, or at least match the write back to a period(s) when there are sufficient losses to cover the credit

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By User deleted
27th Nov 2012 18:33

Breakeven?

It is a fallacy to consider the events as a single transaction. The loss on the property is a loss, end of story - unfortunate, yes, but would have arisen regardless of whatever action the bank took.

The taxable credit is a function of the bank's decision - to say that it is a "corresponding" taxable profit is nonsense.

Taxpayer should be grateful that the bank have written off the debt - cheaper to pay the tax than have the bank pursue the company/directors for repayment of the entire sum.

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By paddy55
30th Nov 2012 05:57

Loss and loan

There are two items here. One is a loss of the sale of the property. The second is a forgiven debt by the bank.

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By Cally-
12th Jan 2013 22:48

related question how to write off a loan from a private individu

A friend lent our (almost dormant) company some money 10 yrs ago.

5 yrs ago he said he didn't want or need it to be paid back. He'll give me a letter if we need documentation.

Currently this still shows up on the books as a liability being carried forward every year. As we're looking for investment it makes sense to get it off the books.

What adjustment (double entry) do I need to make on the books to write off this loan?

Obviously I'm not an accountant so please be really simple :-)

Thank you!

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Replying to johnjenkins:
By paddy55
13th Jan 2013 03:17

Loan to company written off

Basically, it's a gift or donation from your friend to the company. We eliminate the loan and show an equivalent amount as "Loan written off, donation received"

Dr. Loan account             x

Cr. Loan written off           x

 

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Replying to Wanderer:
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By Cally-
13th Jan 2013 04:24

Loan to company written off

Hi paddy55,

Should I create a new nominal account for "Loan Written Off"?

If so, should it be classed as a Current Asset on the Balance Sheet?

(Is there likely to be a suitable existing nominal account for sundry receipts on TAS software?)

Thank you!

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7om
By Tom 7000
13th Jan 2013 11:46

loan write off
If you write it off, as above , then you pay tax on it. Why don't you stand in the shoes of the old loan note holder, ie you buy his loan off him for a pound, or he gives it to you. Then the money's owed to you and it can be drawn tax free...unless someone in here thinks that will create a tax liability I have missed?

Otherwise liquidate/ close down the company, if it has no other assets and you don't get a tax bill...

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By Cally-
13th Jan 2013 15:20

Writing off loan to company

Hi Tom 7000,

If I buy the loan off him for a pound what would the double entry be?

Thanks

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7om
By Tom 7000
14th Jan 2013 09:19

double entry

In the accounts where it says loan from ''Bob smit''h...you change the account name to loan from ''Cally''. The transaction happens outside the company. Imagine if you bought 100 share in lloyds tsb...would their FD put any entries throgh the books...no, he would just change the name of the shareholder

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7om
By Tom 7000
14th Jan 2013 09:20

tax

run the same question on taxationweb.co.uk and see what they think...Its not the accounting that you worry about its the TAX!

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By paddy55
14th Jan 2013 22:50

Loan to company written off

Hi Cally,

The Loan Written Off (donation received)  must end up in the Profit & Loss account by hook or by crook. Once you have carried out the journal entry that I mentioned (Dr Loan account;  Cr Loan written off), then there will be no items to go in the Balance Sheet so the question of Current Assets/Current Liabilities will not arise.

Of course, a person donating $1000 to a company or a person buying a $1000 loan for $1 lack commercial reality.

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7om
By Tom 7000
15th Jan 2013 09:49

Paddy 55

if the company has net liabilities in excess of £1000 then buying the loan for £1 may be  fair value. Just look at HMV shares....

 

So you may be right I may be right, but theres just not enough info to tell

 

 

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By Cally-
16th Jan 2013 19:03

writing off a loan to the company

What do you folks think if I, as a company director, show the loan as paid from the directors' account?

That would increase the amount the company already owes to us. (It is substantial due to all the operating expenses we've paid in cash. We will probably capitalise some or all of the balance in the directors' account. The company is not yet in a revenue-making position, so there are no taxation issues.) 

Then the debt would become a matter of a private debt between me and this friend.  (Which is exactly the true state.) I could ask him to document that he considers himself as paid by me.  (We provided him rent-free accommodation for 2 years in the past; it would stand up to scrutiny if it ever came to that.).  This would be effectively the same as changing the description on the loan account from my friend's name to my name, then adding it in with the other amount the company already owes me.

In any of the scenarios mentioned previously I don't understand what if anything would go onto the P&L.  The debt is on the balance sheet as a liability, and if it is paid (e.g. by the directors) then it is still only on the balance sheet--isn't it?

Many thanks from a non-accountant for all your ideas about this.

 

 

 

 

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7om
By Tom 7000
16th Jan 2013 20:38

yes
Nothing goes in the p and l if you do that and don't write it off. So what you said pretty much stands.

Anyway haven't you got a tame ACA in your pocket who does your tax return etc that you can just email these sort if questions to? You'll probably need one to do your year end co accounts, don't often see non accountants in here...

Www.ttca.co.uk if you need some help with more questions in the future... See if u can see me on the staff page ;)

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