Conflicting advice from 2 Accountants
Discussion
The scenario is
Company A And Company B each owned 50/50 by a married couple
Company A lends B 150k
Several years later they are parting ways.
One is getting A, the other B
One accountant says they can write off the loan with no tax implications.
One accountant says not.
Anyone able to offer a tie breaker?
Company A And Company B each owned 50/50 by a married couple
Company A lends B 150k
Several years later they are parting ways.
One is getting A, the other B
One accountant says they can write off the loan with no tax implications.
One accountant says not.
Anyone able to offer a tie breaker?
MaxFromage said:
Yes. There are tax implications for both the companies and the shareholders.
The accountant who (may) understand what they're talking about needs to discuss the corporation tax effects of the write-offs and also the potential distribution to shareholders.
Only the accountants can answer these questions as all facts need to be known.
Thanks for all the answers The accountant who (may) understand what they're talking about needs to discuss the corporation tax effects of the write-offs and also the potential distribution to shareholders.
Only the accountants can answer these questions as all facts need to be known.
The company accountant seems to think there is no issue - The corporation tax act of 2010 has provisions for this and it is (or can be) seen as tax neutral as the loss is matched by a profit.
I appreciate it's complicated and I'd be inclined to allow the company accountant to do what he sees fit and proper and rely on that advice.
Eric Mc said:
It is (possibly) neutral in that the write off (loss) in one company is compensated for as income (profit) in the other.
However, they are two separate companies and may have different rates of Corporation tax applying to their profits and loss reliefs. So, even though the written off amount may appear as the same amount in each company, the effect on the individual companies' Corporation tax liabilities may be different.
So possibly not "neutral" when it comes to actual tax.
here's what chat GPT says:However, they are two separate companies and may have different rates of Corporation tax applying to their profits and loss reliefs. So, even though the written off amount may appear as the same amount in each company, the effect on the individual companies' Corporation tax liabilities may be different.
So possibly not "neutral" when it comes to actual tax.
Under the Corporation Tax Act 2009 (CTA09), section 354 (CTA09/S354) has implications for connected companies regarding impairment losses. Here are the key points:
Creditor Companies:
When a creditor company lends to a connected debtor company, it generally cannot claim debits for impairment losses related to that debt.
Exceptions exist for debt-equity swaps and insolvent creditors.
If the companies become connected after the loan, no write-back of impairment relief is allowed, but no further relief is granted either.
The starting point for impairment relief is the debt’s value in the accounts at the end of the accounting period preceding connection.
Debtor Companies:
A debtor company is not required to bring in credits when released from a liability by a connected creditor (unless it’s a ‘deemed release’).
This rule also applies if the debtor was connected to the creditor but ceased to be connected due to the creditor’s insolvency.
And Thanks for the input - I am not expecting any proper advice but I am grateful for the comments
Eric Mc said:
That all seems rather generous.
Have you considered what the Income Tax implications might be for the individual director of the company that received the loan?
At some point the director of the recipient company might want to extract some or all of the loan their company received and which they are now allowed keep.
The loan was used to buy a property in a limited company and as far as I know no cash has been extracted. Corporation tax will be due upon the sale of the property.Have you considered what the Income Tax implications might be for the individual director of the company that received the loan?
At some point the director of the recipient company might want to extract some or all of the loan their company received and which they are now allowed keep.
this is following a conversation with a frustrated friend who is going through divorce - it's all pretty amicable (in terms of financial settlement, indeed the husband should be snatching her hand off ASAP, and they have drawn up a separation order for both the business and personal assets and the company accountant agreed at the time this was an acceptable way forward.
They are finalising the agreement and one party's solicitor has advised further accountant input and it's this accountant that has cast doubt on the original advice. They have a clause in the agreement which says neither party will come after the other for any future tax liability.
I am not really party to their detailed financial history, just been the recipient of some frustrated ranting, so thought I'd ask here as I sit at my desk staring out of the window as I am the sort of sad case that finds this type of thing interesting.
Eric Mc said:
I would assume that company that made the loan still has the loan showing in its balance sheet as a "current asset".
Once the lending company makes the decision that it will not seek to recover the loan, then it MUST write that loan off in its profit and loss account. This is an accounting, not a Corporation Tax requirement.
It's not possible to say what impact this will have on the company doing the writing off but it could be quite severe regarding its solvency.
I don't expect that the lending company ever charged interest on the loan.
Thanks EricOnce the lending company makes the decision that it will not seek to recover the loan, then it MUST write that loan off in its profit and loss account. This is an accounting, not a Corporation Tax requirement.
It's not possible to say what impact this will have on the company doing the writing off but it could be quite severe regarding its solvency.
I don't expect that the lending company ever charged interest on the loan.
Yes that's what happened and it was agreed that there would not be eligible to be included in any corporation tax calculation. The opposite happened with the borrowing company and no corporation tax deduction is to be claimed.
Any impact on future dividends is for each party to sort out post divorce
Eric Mc said:
Depending on the state of the company at the time of the write off, it could make one technically insolvent and block the ability of a director/shareholder from being able to remunerate themselves from their own company.
I haven't got the full accounts but the loan was made out of cash reserves.The lending company is a pretty simple trading company with very few assets or liabilities beyond what is effectively WIP for the owner and some sub contractors
It's effectively money in from contract, money out to subbies.
I *think* it might impact the ability to take dividends in the relevant year but I'm not sure, but that would be a relatively minor issue given the circumstances.
Eric Mc said:
We do know, based on what you told us, that the lending company has one asset of £150,000 in its balance sheet i.e. the loan it made to the other company. It may have cash in its bank account as well - how much you haven't disclosed.
This proposal will involve this company eliminating the entire asset of £150,000 from its balance sheet.
Based on what you have said above, writing off the asset of £150,000 could seriously undermine the company's balance sheet.
Yes it would take it from having 150k asset plus a few grand cash This proposal will involve this company eliminating the entire asset of £150,000 from its balance sheet.
Based on what you have said above, writing off the asset of £150,000 could seriously undermine the company's balance sheet.
To just a few grand cash.
Creditors / Debtors marginally positive but again nothing massive.
The company doesn't have any employees or other long term creditors.
Eric Mc said:
Sounds like he is wrecking his own company.
I presume before the loan was made the company must have had £150,000 plus "Cash in Bank" which it has more or less just given away.
Basically, it's made a gift.
They are getting divorced. It's not his company, it is their company, as is the company that borrowed the money. All owned 50/50. I presume before the loan was made the company must have had £150,000 plus "Cash in Bank" which it has more or less just given away.
Basically, it's made a gift.
They have to split the assets one way or the other, and the company that made the loan can continue to trade with zero impact.
Getting divorced is sub-optimal from a financial point of view, that's for sure, but it could be far worse if it all kicks off.
Eric Mc said:
Was there ever a likelihood that the original £150,000 loan would be repaid?
Did the original loan have any sort of loan agreement - stating the terms and conditions of the loan - in place?
Or was it only ever a very casual arrangement along the lines of "here's some money, pay it back whenever you can"?
You have to remember the context - both companies equally owned by a long term married couple (20 plus years by the time the loan was made)Did the original loan have any sort of loan agreement - stating the terms and conditions of the loan - in place?
Or was it only ever a very casual arrangement along the lines of "here's some money, pay it back whenever you can"?
As far as I know there is no loan agreement and the plan would have been to repay when the properties were sold. (This is a presumption)
The companies will have been structured this way to spread the burden across the couple, and this has been in place for quite some time.
Panamax said:
And let's not forget a director needs to act in the best interests of the company, not of himself/herself. In what way does it serve the interests of the company to wave goodbye to £150k, apparently for no reason?
The shareholders are the same in both companies.Nobody is being disadvantaged.
If the company ceased trading today there would be no unsatisfied creditors.
Eric Mc said:
Are they both still directors/shareholders of both companies?
Do they have equal shareholdings?
Did both parties "work" in the companies - or was one just a named director/shareholder so that income (salaries/dividends etc) could be split for tax efficiency purposes?
There are all sorts of areas where this can go very badly wrong for either or both parties.
Yes both still directors and equal shareholders.Do they have equal shareholdings?
Did both parties "work" in the companies - or was one just a named director/shareholder so that income (salaries/dividends etc) could be split for tax efficiency purposes?
There are all sorts of areas where this can go very badly wrong for either or both parties.
One of them did basic admin such as invoicing and banking (this was genuine) but doesn't do so anymore as she now has a full time job to pay the bills.
The only other alternative is really to liquidate everything and divide the cash. Which is even more sub-optomal. (Main residence already sold)
It's an interesting situation really. The question is "can this loan be written off legally" to which the answer appears to be "yes".
The rest is really a consequence of divorce, which is rarely ever a good outcome for all parties.
Eric Mc said:
Therefore the company that has literally thrown away £150,000 is "satisfied" with that outcome?
What happens to the property that is owned by the company that received the loan?
If and when that property is sold I presume whoever is left owning that company gets their hands on the proceeds.
Therefore, it looks to me that the company writing off the loan it made will also be throwing away access to any monies generated by the sale of the property - which I assume is worth substantially more than £150,000.
The whole thing is actually much, much more complicated and potentially dangerous than the OP seems to be intimating.
All this is true.What happens to the property that is owned by the company that received the loan?
If and when that property is sold I presume whoever is left owning that company gets their hands on the proceeds.
Therefore, it looks to me that the company writing off the loan it made will also be throwing away access to any monies generated by the sale of the property - which I assume is worth substantially more than £150,000.
The whole thing is actually much, much more complicated and potentially dangerous than the OP seems to be intimating.
Equal sacrifices are being made by each of the shareholders. It's as close to 50-50 as is possible and with a clean break
I don't really have any more information - I was discussing the situation this morning and as I was faffing around researching for a meeting I thought I'd ask. I can't really help them, I was just interested in the legalities.
Mr Overheads said:
So in essence after swapping their 50% holdings for nil or equal value:
Company A's shareholder gets left with an insolvent company that they can't take any drawings from, unlikely there is enough profit to do so.
Company B's shareholder owns a company that doesn't have to repay a loan for a property that can be sold and the proceeds end up in the bank account of Company B.
Company B is getting a good deal, Company A's Director (with a Director hat on NOT a shareholder hat) is not acting in the best interests of the Company or shareholders by agreeing to that deal.
They are both directors and shareholders of both companies.Company A's shareholder gets left with an insolvent company that they can't take any drawings from, unlikely there is enough profit to do so.
Company B's shareholder owns a company that doesn't have to repay a loan for a property that can be sold and the proceeds end up in the bank account of Company B.
Company B is getting a good deal, Company A's Director (with a Director hat on NOT a shareholder hat) is not acting in the best interests of the Company or shareholders by agreeing to that deal.
The person who will be left with company A is not disadvantaged as they are getting other assets and a clear run going forward.
It's a very equitable split for both parties
Company A appears to lose out but the shareholders do not lose out and agree to all the terms, which will be subject to a binding court order.
Edited to add
Company A won't be insolvent. It will just be less solvent
Edited by TownIdiot on Thursday 13th June 15:16
C4ME said:
As frustrating as your friend finds it, the financial settlement will be reviewed by the family court so you can see why the solicitor wants to ensure there is no blowback.
It's not the solicitor They have agreed it and suggested getting an accountant to go through it.
For reasons unknown they went to a different accountant and he said
You can't do that
As opposed to
You can do this but it could cost you X
Both a happy to cover any subsequent tax costs themselves.
Eric Mc said:
I also wondered if there was any sort of financial charge on the property and if there were any personal guarantees signed by one or both directors.
Was the property bought by the company outright for cash or is there a third party lender involved?
That side has been sorted. Or it will be if they can sort this out. (there is more than one property in the ltd co and only one is mortgaged to a relatively low LTV)Was the property bought by the company outright for cash or is there a third party lender involved?
In essence the the financial separation order is ready to go to the court if they can solve this issue.
Panamax said:
You need to understand that limited companies are not simply vehicles for tax avoidance.
Ask yourself, why is this mechanism being proposed/used?
So that they could put some cash into a different limited company to buy a property, whilst ensuring A retains its status as a trading company rather than an investment company.Ask yourself, why is this mechanism being proposed/used?
That's my supposition as I was involved in setting it up.
And whilst I agree they aren't simply vehicles for tax avoidance, they are vehicles that provide different tax treatments to operating as a sole trader.
I can't see anything wrong with A lending B the money.
Tax will be paid should B generate any profits, just as it would have been had company A.
I'd be going with the company accountant's advice and cracking on with getting divorced. Particularly if I was the bloke (A) as he's got a good deal.
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