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Write off of participator loan after death

Is the write off of a participator loan, after their death, taxable on the beneficiaries?

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Trade Co is owned by Mr A and his 2 children, B and C - 50:25:25. Mr A has taken loans out of the company of £500k. s455 has been paid.

Mr A dies. His estate is made up purely of his shares in Trade Co (worth £1m). The loan to Trade Co is the only liability. B and C are entitled to the residue of his estate 50:50.

B and C, who are directors, write off the loan after their father passes.

s455 will be repayable to the company. 

The estate will be subject to tax on the write off under ITTOIA 2005 Part 5 Chapter 6 - s664(2)(d) in particular.

When the estate is wound up, and the residue (i.e. shares in Trade Co) passed to B and C, will the £500k be taxable on them as beneficiaries?

 My initial take on it is they will be but happy to be convinced otherwise.

Replies (6)

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Hallerud at Easter
By DJKL
12th Oct 2019 11:37

Given nobody else has answered , which is a shame, those who help others on here ought to be helped,I will offer my somewhat worthless viewpoint.

I would say, upon reading, that I agree with your interpretation, the wording at (d) appears pretty clear to me:

"(d)in a case where section 419(2) applies (release of loans to participator in close company: loans and advances to persons who die), the amount that would be charged to income tax under Chapter 6 of Part 4 apart from that section, and"

I would further say that my agreeing is likely the kiss of death to such an interpretation, so hopefully for you (and your clients) someone will come along and denounce such a position.

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By unearned luck
12th Oct 2019 18:13

I too agree.

HMRC consider it to be (part of) the residuary income of the estate to be included on the R185s to be issued to the residuary legatees. See TSEM7678 and on this occasion I think they are right.

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Lone Wolf
By Lone_Wolf
14th Oct 2019 09:57

Thanks for the responses, which seem to agree with my thinking.

As it is Mr A is alive and kicking, but won't be overly delighted that his cunning plan to avoid HR tax on this w/o won't work.

Although if he's dead then I guess he has technically avoided it.

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By The Dullard
14th Oct 2019 10:42

I assume that the shares of the company will qualify for 100% BPR, because otherwise there is also an adverse IHT effect of the scheme due to IHTA 1984, s 175A.

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By Tax Dragon
14th Oct 2019 11:08

As you say, s664(2)(d) is express vis-à-vis the estate. The residuary beneficiary gets caught by s666, which brings in the s664 amount.

Does anyone have an example of what would be within s664(2)(b)?

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Replying to Tax Dragon:
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By Tax Dragon
14th Oct 2019 16:27

Tax Dragon wrote:

Does anyone have an example of what would be within s664(2)(b)?

Scratch that. It's obvious. I misread (or perhaps underread) it.

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