My VIP Tax Team question of the week: Waiver of Intercompany loan

My client owns the entire share capital of two personal companies and is considering making a loan from one to the other. Are there any tax consequences in later waiving the loan?

There appear to be two issues to consider here, the companies’ tax position and that of your client as shareholder/director.
A loan between companies falls within the loan relationship regime and so a loan waiver will result in a credit in the borrowing company and debit. As the two companies are connected companies within the meaning of s466 CTA 2009, no relievable loan relationship debit or taxable credit arises – s354 and s358 CTA 2009 respectively.

The waiver of the loan will be passing value out of the lender company and so this will be a distribution under s1000 CTA 2010. Consequently, the shareholder will be taxable on this distribution under s385 ITTOIA 2005 being the only person entitled to such distributions. If the loan had become irrecoverable, then no waiver would be required but then that would cast doubt on the bona fides of the loan itself. I would add that a loan waiver should be made under deed which, being a reserved activity, would usually be drafted by a solicitor.

A loan between such personal companies will not result in a charge under the loans of participators rules of s455 CTA 2010 but is within the scope of the anti-avoidance rule s464A CTA 2010. HMRC’s commentary at CTM61580 suggests they are only concerned with scenarios where the value ends up in the hands of the shareholder or an individual who is an associate of the shareholder.

The above income tax treatment of a waiver should not come as surprise as it simply mirrors the tax treatment of the alternative choice of the shareholder receiving a dividend and then personally injecting capital into the other personal company.

The existence of a loan would usually be evidenced by a formal loan agreement. Where transactions involving companies are concerned, there is an old adage that companies have no mouths and so cannot enter into verbal agreements meaning all transactions purporting to involve companies should be in writing. There may be exceptions, but a formal loan agreement is prima facie evidence that a loan debt exists placing an obligation on the borrower to repay the debt.

If a controlling shareholder/director simply transfers one company’s funds to another company, that it is not evidence of a company loan but rather the shareholder/director using the company’s funds for personal reasons. Such transactions would usually be posted to the director’s loan account, not an inter-company loan account. Ensure there is an evidential paper trail for the existence of a loan to minimise possible queries from HMRC.

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Tax Consultant
0844 892 2470

David started his tax career with the Inland Revenue and then moved into practice with responsibility for the tax department of a mid-size practice. David has experience of dealing with, amongst other things, trusts and estates, HNW individuals, non-residents and both OMBs and large companies. He is qualified with the Association of Taxation Technician.

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