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Wednesday Wondering

Does a BIK arise on a loan to an employee's Ltd company?

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I am merely musing here and have done very little actual research to confirm or deny as yet, but thought I’d raise this for discussion.

If an employee’s salary is paid to a third party, regardless of it being paid to that third party, it remains taxable on the employee as it arises from their employment.

If the employer were to loan money to a member of that employees household, interest free, then the benefit arises on him as again, the benefit arises from his employment.

Say we have a family company. Owned 50:50 by maw and paw. Son works for it.

Son wants to start a property investment company but doesn’t have the cash. Neither do maw and paw, but their company does. To give him a start, their company lends his company £100k interest free.

Does a BIK arise on this loan? On son, or on parents ?

A third party has been placed in the way, but does that stop the BIK? If they paid his salary to the Ltd company, then it would remain taxable on the son.

Say the loan was written off. I’d say that at best it is a distribution to the parents, at worst a PAYE income for the son. It’s the company’s money after all that they are using for personal reasons.

A genuinely commercial rate of interest probably solves a lot of these problems, but when do client’s ever think things through before doing them.

Some thinking to do tomorrow me thinks, but comments welcome.

Replies (3)

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By paul.benny
21st May 2020 13:25

It's an interesting question and I don't know the answer.

That said, the parties would be wise to formally document the loan What happens if parents want/need the funds (personally or in their company). Or want to sell the company? What happens if son's investments don't work out? Or if they go spectacularly well - maybe parents will want a share of the profit. Etc

That gives an opportunity to make the loan interest-bearing - thus removing any possibility of a bik. The parties could even have the option to capitalise the interest until some future date. Not my expertise but isn't the interest taxable/deductible on a receipts basis? That would remove any immediate tax charge and possible unusable losses.

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By The Dullard
21st May 2020 14:06

I know the answer. It's in the legislation. Employment-related loan has a very specific meaning (ITEPA 2003, s 174). There is no BIK, and no employment tax charge for the son if the money doesn't find it's way to him personally.

The rules on late paid interest to connected parties only operate to deny a deduction if the recipient's receipt isn't included in the calculation of profits (including where profits are zero, because there is a loss) chargeable to corporation tax. Loan relationships for companies liable to CT are generally dealt with on an accruals basis, including this situation.

A formal waiver of the loan might be considered to be a distribution, but simple impairment of the debt might have the desired effect in these circumstances...

But. How has the son's salary entitlement just gone away?

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By Justin Bryant
21st May 2020 16:34

Yes; surely this is no different to a sole director/share holder of two companies lending from one of his companies to the other i.e. not within ITEPA 2003 (as we all know a GP borrower with him as a partner may be a different matter re s455 etc.).

Also, any idea how the advent of -ve interest rates may change all this kind of stuff?

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