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Writing off Inter-company Loans & Trading Status

Intercompany loans - Trading & Investment Statuses - Release of Loans for Connected Parties

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Hi All

A client I'm working with is dealing with something that is a little out my league. Any help would be apreciated.

There are 2 companies, A and B Ltd. They are connected parties for tax purposes.

A ltd is a trading company, for tax purposes.

B ltd is a property investment company. An 'investment company' for tax purposes.

A ltd has loaned B ltd in excess of 1m. B ltd has used these funds to purchase property investments.

My client is potenitally looking to transfer shares in the future and my thoughts are, given that the inter-company loan is quite large, this could bring the trading company into 'investment company' territory for tax purposes, which would limit their ability to obtain the various reliefs when transfering shares.

I've done some digging and due to various reasons, it is looking unlikley that B ltd will be able to repay the inter-company loan in reality, which means it could be impaired.

SO MY QUESTION(S):

1. Do you 'need' a specific reason under FRS102 (such as impairment etc) to release an inter-company loan? Or can company A simply release it just because they want to given the strategic direction of the group? If it was released simply because they want to, would HMRC take issue with this given the situation with the potential investment status?

2. I know release of inter-company loans does not lead to an income or expense in either company for tax purposes - aside from this are there any other considerations I should be aware of tax-wise? Such as issues with trading/investment statuses?

Thank you in advance to anyone that can help.

Replies (7)

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paddle steamer
By DJKL
14th Sep 2021 12:15

Which company's shares are to be transferred, tradeco , propco or both?

You mention Group, is it a Group or is it two companies with the same individuals as the shareholders of each?

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Replying to DJKL:
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By Luke Spooner
14th Sep 2021 13:41

Hi DJKL

tradeco shares to be transfered. and yes not a group but controlled by same person

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By paul.benny
14th Sep 2021 12:20

From another thread (started today by "Luke5")

Luke Spooner wrote:

I'm currently studing ATT...
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Replying to paul.benny:
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By Tax Dragon
14th Sep 2021 12:41

On further consideration, I reckon I can provide a full answer to David Ex's genuine question (https://www.accountingweb.co.uk/any-answers/free-advice).

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Psycho
By Wilson Philips
14th Sep 2021 13:43

"They are connected parties for tax purposes"

There are different types of connection for different tax purposes. You will need to elaborate on the nature of the connection.

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Replying to Wilson Philips:
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By Luke Spooner
14th Sep 2021 18:26

Hi Wilson

It's my understanding that for tax purposes as 'connected party' is either a group structure such as a parent and subsidiary, or two seperatly owned compnaies that are 'controlled' by the same person by virtue of voting rights or shares etc.

In this case the companies are seperate but controlled by the same person.

Hope that helps?

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By GR
14th Sep 2021 14:47

1. I think you need a solicitor to draw up a formal deed/loan waiver regarding the release.

2. Assuming both companies are under common control there is probably no income/expense to worry about. The trading status of the trading company may be an issue depending in whether ER/BADR needs to be claimed in the future.

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