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Where Taxpayers and Advisers Meet

S455 Loan to protect Entrepreneurs relief?

tpacker
Posts: 2
Joined: Mon Jan 21, 2019 6:06 pm

S455 Loan to protect Entrepreneurs relief?

Postby tpacker » Mon Jan 21, 2019 6:20 pm

Director expects to be able to extract money from a company in the future by Entrepreneurs relief, either by selling shares in the company or alternatively by liquidating the business for its cash balance. The issue is the director has cash needs in the short term and the company is not ready to be either sold/closed yet.

Working Example.

£1m cash in post-corporation tax in the business. The two treatments of this are:

1. Paying a Dividend - tax rate 38.1% (£381,000 in tax).
2. Sale/Close - claim Entrepreneur's relief - tax rate 10% (£100,000 in tax).

Alternatively, the company lends the director ~£755k and pays (32.5%) S455 tax on this (So: £245k tax paid now).

The director pays 2.5% interest (HMRC rate) on this (~£19k) per year. As income to the company this is then taxed at about 50% (corporation tax + future dividend of the profits) - so a loss of ~£10k per year in tax. Because the director pays the HMRC rate on a fixed and invariant loan - no Benefit in Kind payment is due.

The director borrows the money for 3 years at which point he repays the loan from other sources. 9 months after the end of the corporation tax period in which the loan is repaid, the company gets back its £245k in tax that was paid.

The company is then either sold or closed and the director gets the £1m original post corporation tax balance and pays 10% entrepreneurs relief on that.

In this way, director has had access the £755k of cash for a total cost tax cost of about £30k (£10k per year) - saving £281k of tax by using entrepreneurs relief 3 years in the future instead of paying dividend tax now.

Are there any issues with this or am I missing anything?

AGoodman
Posts: 665
Joined: Fri May 16, 2014 3:47 pm

Re: S455 Loan to protect Entrepreneurs relief?

Postby AGoodman » Wed Jan 23, 2019 1:59 pm

No obvious problems I can see other than - will the large sum of cash in the business (including any further cash it generates over the 3 years) put ER at risk or is it small in the context of the business.

tpacker
Posts: 2
Joined: Mon Jan 21, 2019 6:06 pm

Re: S455 Loan to protect Entrepreneurs relief?

Postby tpacker » Wed Jan 23, 2019 7:39 pm

No obvious problems I can see other than - will the large sum of cash in the business (including any further cash it generates over the 3 years) put ER at risk or is it small in the context of the business.
Hi, thank you very much for this. Is there any advice on the impact on cash on ER? Presumably if liquidating - there would only be cash. Is there a % in terms of exit value for a purchase?

bd6759
Posts: 3008
Joined: Sat Feb 01, 2014 3:26 pm

Re: S455 Loan to protect Entrepreneurs relief?

Postby bd6759 » Fri Jan 25, 2019 12:29 pm

You didn’t mention liquidation in your first post.

See s1030A CTA 2010

S396B & S404A ITTOIA 2005


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