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Treatment of directors loan on death

Death of a director with an overdrawn directors loan

Hi,

I wonder if someone can help.

Small company with 2 directors and 50/50 shareholders of which one of them has sadly passed away suddenly.

The issue we have is that we have just finalised the most recent accounts and there is an overdrawn directors loan for both of the directors/shareholders. The year end date was about 10 days after he died.

Therefore could anyone guide me as to what happens to the directors loan for the individual who has died please?

Thanks in advance

Matt

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13th Jun 2018 15:37

How much are we talking about. How are you dealing with the surviving Directors loan? Is there anything in the Co Articles that specifically deals with this scenario?

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to ccassociates
13th Jun 2018 15:45

They both have loans of just over £20,000

The surviving director will either repay the loan or the company will pay the resulting corporation tax on it.

Nope - nothing in the Articles that would help.

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13th Jun 2018 16:35

Presumably if the director had died prior to the year end he was by default no longer a director? As such I'd question the treatment of it as a director's loan for taxation purposes. There are certainly more experienced users who may comment, but this would be my first line of enquiry. What happens with the resulting debtor presumably lies with the remaining director.

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13th Jun 2018 16:41

Not sure what the problem is here. Upon the death the deceased’s liability to the company ipso facto became a liability of his estate, for his executors to repay out of the assets in his estate when they have obtained probate. That is all.

Now, if the estate is insolvent it becomes a bit more complicated.

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13th Jun 2018 18:07

Is it not as simple as:
1. Was he a director at the YE? No = other debtor.
2. Does the surviving director expect to get the £20k from the estate? Yes= other debtor; No = w/o

??

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to atleastisoundknowledgable...
13th Jun 2018 19:30

Agreed except that the money is due to the company not the surviving director.

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to johngroganjga
14th Jun 2018 07:56

johngroganjga wrote:

Agreed except that the money is due to the company not the surviving director.

When I said “does the surviving director expect to get the money?” What I really meant was “does the surviving director expect the company to receive the debt owed to it by the deceased’s estate?”

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14th Jun 2018 14:27

Many thanks for your responses.

I am not sure that the company has much chance of getting the loan repaid from his estate to be honest - which means it will have to be written off in the company accounts.

One final question - will the write of the loan be tax deductible for the company in this instance?

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to mattwadz
14th Jun 2018 15:28

Tax relief under s458 CTA 2010 seems in point, but I don't immediately see why the write-off would be deductible.

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to Tax Dragon
14th Jun 2018 16:34

Would the estate need to treat it as taxable income?

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to atleastisoundknowledgable...
14th Jun 2018 16:55

On what basis?

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to Tax Dragon
14th Jun 2018 19:08

If a company w/o an overdrawn loan (eg DLA) it would be chargeable on the individual ...

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to atleastisoundknowledgable...
14th Jun 2018 22:36

And does the basis on which it would have been chargeable on the individual subsist in the estate?

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to Tax Dragon
15th Jun 2018 06:57

It’s a liability of the individual, so why wouldn’t it follow through to the estate?

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to atleastisoundknowledgable...
15th Jun 2018 07:30

Depends why the tax charge arises on the individual. For example, if the lifetjme charge arises because the individual is employed, that basis of charge ceases to exist on her death.

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to Tax Dragon
15th Jun 2018 08:22

If I have an overdrawn DLA of, say, £10k that the company writes-off, then that £10k adds as my income, taxable under income tax.

Isn’t this what has (essentially) happened here? An additional income tax liability has arisen for the deceased, to be settled by his estate.

If I’m wrong somewhere, say - it’s more than possible (English self-deprecating middle-class comment)

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to atleastisoundknowledgable...
15th Jun 2018 09:23

But the decision to write off is made now, after death. You need to distinguish the deceased from the estate. Income of the deceased goes on tax return to date of death. Income of the estate is taxable on the estate.

What should happen is the estate repays the debt and there is no income. Since the estate presumably has 50% of the shares, one would imagine that it has assets to repay the debt. Job done.

If instead the debt is waived, that is a receipt of the estate post death. I am not aware of any reason why it should be taxable - doesn't mean there isn't one of course (use a double negative for proper self deprecation).

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to Tax Dragon
15th Jun 2018 10:43

Good point.

I told you (implied) that I wouldn't be surprised if I was wrong.

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By frankfx
15th Jun 2018 01:02

Hmrc manuals

Ctm61665

May help with your deliberations.

The surviving director.... And now 100%
Shareholder..? .... Think about this..? Articles etc.....

... May want to be assured that zero cash outflows to HMRC will follow untimely death of director

The surviving director may also want assurance that the director loan accounts have been accurately recorded... And are indeed loans...

P11d season ends in 3 weeks. Bik on the loan interest.

The surviving director may have questions that he is afraid to ask... Or didn't even know such questions existed.

The executors of the deceased estate, lawyers may be appointed if money is demanded from the estate , may raise their own questions when deceased director tax liabilities are being finalised.

Where I have clients with non relative partners or Co directors or participators
I always raise the subject of life cover.

Policy written in trust for survivor... Or the company.

Company bank account pays the premiums... Then all parties know cover is in place.

Then on specific transactions... In this case a meaningful loan...

.. Life cover or ability to repay loans is discussed again.

Case study
Case in point

30 years ago a partner died. This was pre self assessment... Note For older readers partnership tax was a joint and several liability

Partnership business liabilities and tax liability fell on surviving partner.
His own skill sets were not adequate to keep the business going
His marriage did not survive the financial burden and stress that followed.

The deceased partner life cover was in trust.... To building society and spouse.

Key man life cover is always worth it, in my view

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to frankfx
15th Jun 2018 10:02

Ignore the waffle and there's something useful here - an indirect reference to ITTOIA s415.

So the tax position of the estate (and indeed of the company) may depend on whether it (the estate) is a participator at the time the loan is written off.

Which may depend on various agreements to which we are not privy.

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to frankfx
15th Jun 2018 10:03

Ignore the repetition.

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