Lending money to a new Ltd Company

[Lindbot57]

Hi all,

Superb forum by the way!

My son has set up a new Ltd company selling products, I am a sole trader retailer and I wanted to give my son a business loan from my sole trader profits (approx 30k). a good I idea I thought as I personally have no need for my excess profits & my business is well established with no future major investment plans... So all I would be doing is drawing if from my business account into my savers and paying high rate tax on it...

I was under the impression that If I loaned this money to my sons Ltd company I could put this down as a loan and I wouldnt pay any tax on it, until he paid me back and I took it personally as my profit...

But... My sons accountant has told me even if I loan this profit to my son from my business as a business loan I still need to declare it as profit and pay tax on it this year...

Can one of you knowledgable folks on here clear this up for me? or explain if there is any way I can loan this money to my son without paying tax on it...

I look forward to your replies.

 

[john1989]

The accountant is correct.

Allowable expenses reduce profits. A loan is not an allowable expense.
Put it this way, if you obtained a loan from the bank, would you expect the income to count towards your turnover for tax?

 

[kevin.doran]

Put it this way, if you obtained a loan from the bank, would you expect the income to count towards your turnover for tax?

I took on a DIY client a couple of years back who'd just done that. Poor sod increased his £15k loan to about £20k just so he could afford the tax/NI charge!

 

[john1989]

I took on a DIY client a couple of years back who'd just done that. Poor sod increased his £15k loan to about £20k just so he could afford the tax/NI charge!

Wouldn't increasing the loan just cause a never ending carousel tax charge?!

 

[MyAccountantOnline]

...

I was under the impression that If I loaned this money to my sons Ltd company I could put this down as a loan and I wouldnt pay any tax on it, until he paid me back and I took it personally as my profit...

But... My sons accountant has told me even if I loan this profit to my son from my business as a business loan I still need to declare it as profit and pay tax on it this year...

....

As a sole trader you dont pay tax on funds you take out of your business, you pay tax on your profits.

If you give your son or his company a loan the only tax implications it has is if interest is charged that would be taxable, but the actual loan doesnt save you any tax or create a tax charge.

You dont have to declare an interest free loan anywhere.

 

[kevin.doran]

Wouldn't increasing the loan just cause a never ending carousel tax charge?!

Yup - I think they figured that out after going back to the bank twice to amend the amend upwards. I think it was the banks decision to max it out at £20k, not theirs!

 

[Lindbot57]

As a sole trader you dont pay tax on funds you take out of your business, you pay tax on your profits.

If you give your son or his company a loan the only tax implications it has is if interest is charged that would be taxable, but the actual loan doesnt save you any tax or create a tax charge.

You dont have to declare an interest free loan anywhere.

Hi, Interesting reply. Can you please fully explain ''doesnt create a tax charge'' & ''You dont have to declare an interest free loan anywhere'''?

That was my thought all along. I wouldnt charge him interest and the loan would have no time limit on it (maybe verbal agreement of 5-10 years), I just want to help him have some initial cash flow so he doesnt have to go to bank. But I dont want to loan him 30K then for me to be charged a high rate tax on the 30K in my next 2016/2017 tax return.

Is this possible?

 

[john1989]

It means your son won’t be taxed on the loan received.


You are taxed on your profits. The loan has no impact on your profits unless you charged him interest on the loan – in which case it would increase your taxable profit.

 

[Lindbot57]

It means your son won’t be taxed on the loan received.


You are taxed on your profits. The loan has no impact on your profits unless you charged him interest on the loan – in which case it would increase your taxable profit.

Thanks for ll the replies

So are you saying I won't have to declare the 30k loan in my tax return ?

 

[Scalloway]

You don't have to declare the 30k loan in your tax return nor does your son.

 

[UK Contractor Accountant]

Have you considered registering a charge over the company's assets in support of the loan money?

This will protect the assets of the company for yours/sons benefit if the company fails.

 

[Clinton]

OP, I'm not sure if you're misunderstanding something MyAccountantOnline said. I don't think the advice is that you won't pay tax on the £30K.

You'll be making the loan out of profits, profits which you've declared and paid tax on.

So, no, you won't pay tax again, but you don't get off paying tax on the £30K of profit simply because you're loaning it to another business.

 

[Lindbot57]

OP, I'm not sure if you're misunderstanding something MyAccountantOnline said. I don't think the advice is that you won't pay tax on the £30K.

You'll be making the loan out of profits, profits which you've declared and paid tax on.

So, no, you won't pay tax again, but you don't get off paying tax on the £30K of profit simply because you're loaning it to another business.

Hi

Thanks, that's makes it clearer. That's what I was wanting to do, but seams my accountant is correct.

 

[ethical PR]

Hi OP

I agree it's always sensible to formalise the loan agreement, against assets if possible, in case your son's company fails

In this way, you will have some security.

 

[vince]

How about if it's not a loan, but rather an 'investment' so you (your business) become either part owner or shareholder?