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What happens with Directors Loan account and share

What happens with Directors Loan account and shares

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A company has 2 directors with 50/50 shareholding. However, one director has moved on and has resigned. This director has a negative DLA account. As the directors are father and son, the father is happy to write this debt off, as the son could never repay it. Can this be done as an exchange for the shareholding, or is the shareholding irrelevant. There is question that the son may come back claiming half of the company's assets. 

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06th Jun 2019 15:47

The shareholding is irrelevant - if the father wants to remove the son as a shareholder, he should buy the shares from him or repurchase by the company if the articles allow.

Writing off the loan balance is likely to be taxable as income for the son. I'll let someone else comment on that.

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06th Jun 2019 16:17

Yes the waiver of the loan could be treated as consideration for the company to purchase the son’s shares, but watch the tax consequences.

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to johngroganjga
06th Jun 2019 16:20

Can it? If so, we could have done with your help in this thread: https://www.accountingweb.co.uk/any-answers/share-buyback-and-capital-tr...

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to Tax Dragon
06th Jun 2019 16:51

Remember that it is only HMRC that believe that an own purchase needs to be made in cash. The legislation requires only that payment be made in full - it doesn't stipulate the form of the payment.

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to Wilson Philips
06th Jun 2019 17:07

Is "payment" defined, in context? Does HMRC believe what it believes based on that one word?

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to Tax Dragon
06th Jun 2019 17:06

That other thread is whether capital treatment can apply for tax. That is precisely why I said that the tax consequences should be watched.

Of course a company agreeing not to collect a debt can be consideration for shares being transferred to it by the debtor.

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to johngroganjga
06th Jun 2019 17:08

"Consideration" and "payment" being two different things, potentially.

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to Tax Dragon
06th Jun 2019 18:07

Payment is not, as far as I know, defined in this context. But I do wonder if the offset of a debt can be considered to be “payment”. I have my doubts since most definitions involve the transfer of money or goods (in fact, the top few definitions simply refer to settlement in cash, so I guess that HMRC haven't bothered to read beyond those definitions).

We need a Tribunal decision.

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to Wilson Philips
06th Jun 2019 22:06

Wilson Philips wrote:

We need a Tribunal decision.

Maybe John is thinking the OP will take HMRC on? Hence his encouraging "yes" and "of course"s.

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to Tax Dragon
07th Jun 2019 02:31

i have said nothing about the tax treatment, except that it would be wise for the parties to check out what it is before proceeding.

A purchase of own shares which is taxed as an income distribution is still a purchase of own shares - just one that does not meet the conditions for capital treatment to apply. Whether she shares have been purchased and cancelled is a matter of company law, and nothing to do with HMRC.

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to johngroganjga
07th Jun 2019 07:05

So your test case by proxy is between the son and the father/his company, as per the final sentence of the OP?

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to Tax Dragon
07th Jun 2019 16:53

Tax Dragon wrote:

So your test case by proxy is between the son and the father/his company, as per the final sentence of the OP?

I have read this several times, but I still have no idea what it means. “Test case”??

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to johngroganjga
07th Jun 2019 18:47

I may have misunderstood what everyone is saying. My reading:

OP: would son have any comeback if shares are bought back with the consideration being the waiver of his debt?

John: of course not.

HMRC (as conveyed by Wilson): yes. Company law requires payment.

Wilson: I don't know of any clear ruling.

Dragon: John seems to want to get one.

I suspect HMRC has taken legal advice on the matter. You haven't begun to tell us the basis on which you make your assertion. Sorry if my comments can seem flippant. I thought, read in context, it wasn't hard to get my point.

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07th Jun 2019 20:53

@ jam2 (OP).

The key to resolving matters is the prospect envisaged in your final sentence, of:-

“There is question that the son may come back claiming half of the company's assets”.

This prospect MUST be resolved PRIOR TO, or at least as PART OF, operating the mechanics of clearing the son’s overdrawn DLA.

If, as seems highly likely albeit not certain, you act for two or more of the three parties (ie company, father and son) then you should be very conscious of your “conflict of interests” position, if you play any part (including, but not limited to, providing advice) in resolving the questions raised by you.

In implying no criticism, it would assist in one’s gaining an overview and offering a solution, if one knew the amounts at issue, since the solution would probably be different if, say, the overdrawn DLA were £5,000 and the value of the 50% shareholding were £6,000 from if, say, those figures were respectively £50,000 and £6,000.

If, but ONLY if, you are comfortable with (especially in view of the conflict of interest position to which I referred above) acting as a negotiator between the parties, then it is VERY PROBABLE (this depends on the figures) that a legal agreement can be drawn up, under which clearing the overdrawn DLA can be (to use your words) “done as an exchange for the shareholding” (that agreement would almost certainly indicate the “difference” between the two figures, and state how and when any such “difference” would be later settled).

If payments are due by or to the son either (i) on the signing of the agreement, and/or (ii) on later dates, then such payments can be made by or to the father (or by or to the company) depending on (inter alia) the effects on the taxation positions of the three parties and the father’s DLA position.

In short, if you DO decide to take part in resolving the issues (and I emphasise again that the disposal of the son’s shares to the father, or to the company – the former would normally be simpler - should take place on or before clearing the overdrawn DLA) then I am reasonably sure that a competent solicitor could draw up an agreement which does NOT result in some of the possible adverse taxation consequences to which the previous eminent members above have referred.

Basil.

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08th Jun 2019 09:07

IANAL. You'd never have guessed, would you? The Companies Act rule seems to be that the shares be "paid for on purchase". If there is a requirement that the "payment" is the full value of the shares, I don't see it. If there is exclusion of consideration other than the payment, that's passing me by too.

These thoughts put me much closer to John's view... or, at least, have enabled me to see his comments in a different light.

As well as the "payment" issues as regards the shares, there may well be "repayment" issues as regards the loan.

In short, the situation is complex legally and tax wise. It would be a lot simpler if Dad bought the shares at full value and son used the money to repay the debt.

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