This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. To find out more about cookies on this website and how to delete cookies, see our Cookie Policy.
Analytics

Tools which collect anonymous data to enable us to see how visitors use our site and how it performs. We use this to improve our products, services and user experience.

Essential

Tools that enable essential services and functionality, including identity verification, service continuity and site security.

Where Taxpayers and Advisers Meet

Novation of Loan

marc02
Posts:94
Joined:Wed Apr 22, 2009 2:46 pm
Novation of Loan

Postby marc02 » Wed Sep 05, 2018 6:42 pm

I've read an article by a legal professional that discusses the following strategy; (A) Individual takes a loan from X (B) That individual uses the loan to make a director’s loan to their company (C) The loan from X is novated to the company. (D) The company repay the loan for which it is now liable by way of the novation. (E) The individual continues to have a director’s loan account from which they can withdraw funds without tax.

Accepting that under the rules of novation, the lender X must agree to the novation (ie: assignment won't work).

Any thoughts on the legalities of this please?

(NB: The article I read was a few years old!)

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: Novation of Loan

Postby bd6759 » Thu Sep 06, 2018 9:24 pm

Money moving in a circle. What could possibly be wrong with that?

What do you think the consequences might be of the company paying the individual's debt?

marc02
Posts:94
Joined:Wed Apr 22, 2009 2:46 pm

Re: Novation of Loan

Postby marc02 » Sat Sep 08, 2018 11:43 am

A company paying an individuals debt would result in that individual paying income tax on that amount. That is the point of my questions because I see that HMRC treat novation to mean the company would own the debt not the individual. https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm61605

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: Novation of Loan

Postby bd6759 » Sun Sep 09, 2018 11:58 am

Great idea. I'll no longer take a salary. Instead I'll put all my spending on my credit card. Each month I'll novate the bill to the company. That'll work, won't it....?

marc02
Posts:94
Joined:Wed Apr 22, 2009 2:46 pm

Re: Novation of Loan

Postby marc02 » Fri Sep 28, 2018 12:00 pm

I've looked into this a bit further and the source of my question needs more context to understand the tax benefit. Essentially, as described above, it is obvious not to work, but include a partnership into the mix and it looks something like this;

1) Partners decide to incorporate their business.
2) Before incorporation the partners take a loan to repay the partnership on the withdraw capital assets.
3) The capital assets are passed to the new company.
4) The loan is novated to the new company, who now have an interest in the assets.
5) The company repay the loan.
6) The directors end with a directors loan account in their favour.

I have taken the above from slides 8 and 9 of this PowerPoint https://onedrive.live.com/View.aspx?resid=4B84F5F21E0BBB8F!1463&app=PowerPoint&wdSlideId=273&wdModeSwitchTime=1536049094582&authkey=!AD7vjsh7pI3kI34


Save to say, I could really do with some help to understand the proposition better! Thanks


Return to “General”