Is this Legal?

[sitting pretty]

I am managing director of a ltd company I ow 100% and have a signifcant directors loan account based on money I have leant the business over the past 10 years. For some reason I have stupidly never thought to charge the business interest on this money, however I've now got a plan but I need to know if it is legal....

What I would like to do is set up an investment company, and make this money (re above) a loan from this new company to my existing company and bill monthly to get back interest and ultimately repayment to invest the money elsewhere.

My issue is - Can I move this loan from one ltd company to another? Could I say that I leant the money to the current ltd company in a sole trader capacity and I have now decided to transform into another ltd company - so therefore the loan is from the new ltd company? Could I simply switch my directors loan from one company to another?

Are there any other issues I have not thought of?

Thanks in advance for any input

 

[GGGSurrey]

If you want a separate investment company, why not just have the first company repay part of your director's loan and then you can lend that money to the investment company. You can then charge the investment company interest or not if you don't want to.

 

[sitting pretty]

If you want a separate investment company, why not just have the first company repay part of your director’s loan and then you can lend that money to the investment company. You can then charge the investment company interest or not if you don’t want to.

But then if I want to charge interest on the remainder of the loan with the existing company it would be paid to me as an individual and taxed. If it were being paid to a company (which is why I wanted to transfer the entire loan and charge interest in retrospect of the years that I didn't) the money would not be taxed, provided the company did not make a profit - and the money would be free to invest elsewhere. If it was taxed the corp tax is lower than individual tax.

My main point was can I transfer that loan to go via a new company as opposed to directly to me as a soletrader/individual?

 

[akirk]

that money lent will have gone through your accounts in the last 9 / 10 years as a director's loan therefore there is no way in which you can pretend that such monies were from a 3rd party body - your 'investment company'

besides I see no reason why you would wish to make such complicated moves...

£100 lent by the director to Company A
8% interest charged by director to Company A

£108 repayable
income tax payable by director on the interest of £8

but that extra £8 has come out of Company A which you say the director owns 100%
so don't charge interest, instead just take the £8 out as dividends / use it in the company in exactly the same way, and at the same corporation tax basis as you would if you had transferred it instead to this hypothetical investment company - company B.

i.e. don't bother - just leave it as it is... you are no better off with it in Company B than with it in Company A.

Alasdair

 

[sitting pretty]

that money lent will have gone through your accounts in the last 9 / 10 years as a director's loan therefore there is no way in which you can pretend that such monies were from a 3rd party body - your 'investment company'

besides I see no reason why you would wish to make such complicated moves...

£100 lent by the director to Company A
8% interest charged by director to Company A

£108 repayable
income tax payable by director on the interest of £8

but that extra £8 has come out of Company A which you say the director owns 100%
so don't charge interest, instead just take the £8 out as dividends / use it in the company in exactly the same way, and at the same corporation tax basis as you would if you had transferred it instead to this hypothetical investment company - company B.

i.e. don't bother - just leave it as it is... you are no better off with it in Company B than with it in Company A.

Alasdair

Hi Alasdair

thanks for your post. I apologise as I don't think I have obviously been clear enough as to what I am trying to get advice on:

• I already take a salary and a divend (divends are obviously only payable should the company make a profit) from the existing company
• I have a large sum of cash in my loan account (I'm not just talking £100) - if I draw this amount (which I don't want to in full nor is the company in a situation where it is able to in full at this time) I will pay no tax - I will just get my cash back
• I want to make money on my investment in this company - ie charge interest on this loan - if I now start to bill the company I will be taxed on the interest
• I am not pretending there is a 3rd party - a ltd company is a seperate entity whether I am the majority shareholder or not. I want to get the interest without having to pay tax - the way in which I want to do so is by investing the interest directly into other ventures (but I don't want to have paid tax on the interest).
• another reason for creating 2nd company is that I want new ventures to be completely seperate to current ltd company.

charging the interest is a way of creating extra revenue in addition to my salary and dividend. Before the business was incorporated the business was run as a sole trader - therefore I am trying to find out whether I can do the same in the instance of my loan to the business. Or whether I can (on paper) move the debt.

In effect it is a way of generating tax free income to spend on new ventures.

 

[akirk]

Hi Alasdair

thanks for your post. I apologise as I don't think I have obviously been clear enough as to what I am trying to get advice on:

• I already take a salary and a divend (divends are obviously only payable should the company make a profit) from the existing company
• I have a large sum of cash in my loan account (I'm not just talking £100) - if I draw this amount (which I don't want to in full nor is the company in a situation where it is able to in full at this time) I will pay no tax - I will just get my cash back
• I want to make money on my investment in this company - ie charge interest on this loan - if I now start to bill the company I will be taxed on the interest
• I am not pretending there is a 3rd party - a ltd company is a seperate entity whether I am the majority shareholder or not. I want to get the interest without having to pay tax - the way in which I want to do so is by investing the interest directly into other ventures (but I don't want to have paid tax on the interest).
• another reason for creating 2nd company is that I want new ventures to be completely seperate to current ltd company.

charging the interest is a way of creating extra revenue in addition to my salary and dividend. Before the business was incorporated the business was run as a sole trader - therefore I am trying to find out whether I can do the same in the instance of my loan to the business. Or whether I can (on paper) move the debt.

In effect it is a way of generating tax free income to spend on new ventures.

I understand completely

- amount of money is irrelevant - £100 is illustrative, principle is the same.
- 3rd party company I refer to is the hypothetical new company you ask whether you could set up.

the point I am making is that at a tax level it is irrelevant whether you take the money as dividends out of the current company, or charge interest from another company and then take it out as dividends from that company

as you wish to not take the money out, you can invest it from the current company on the same tax basis as investing it from another company.

however, the monies put in have gone through your company accounts as director loans (i.e. from the individual the director - not loans from a business - so you can not now pretend that they were from a sole trader / now incorporating into a ltd company - they are from you personally.

Had you chosen this route originally you would have set up the second company then, put money into that as director's loans and then loaned across...

however as the money has gone in from you personally and is recorded as such it is too late to change that.

your choices now are:

- invest from the current business
- take money out personally and lend to new company (company B)
- set up company B and loan money from Company A to Company B and not go via you at all - as Company A is your company you can do what you want (within the law!) with the money - it doesn't have to have anything to do with DLAs / interest etc. if you have cash - spend it!

I would get an accountant to advise you on the mechanism - I think that you are over-complicating the situation by referencing your director's loan account - just invest the money from this business, or loan it to a second business...

if you insist on it coming out of Company A to you, and then back into Company B you will pay tax...

Alasdair

 

[Fürgefutár.hu]

Surely your accountant can advise on the legality of such matters and propose a solution that will be most economically viable.

 

[Senington]

If I were you I would get the company to repay you the loan and then set up and loan it back again.
Otherwise you will be technically falling short of a contract which is illegal.

 

[sanjiv]

Simples. Director's Loan some money to investment company. Investment company loans this company to ltd company. This money is used to pay back the directors loan.