Inability to write off intercompany loan? Alternative option is not great.

[mandaris]

New poster (longer time lurker).

I think I might have snookered myself. I have an accountant, but I’ve read conflicting advice and I am worried about a big misstep. I also intend to obtain extra paid for advice, once I’ve better substantiated my problem!

My ultimate goal is to simplify things and not leave complicated arrangements for my family should I get run over by a bus.

Background
I and my wife are sole directors and shareholders 51%/49% split of Limited Consulting Company (1) and Limited Property Rental Company (2), the latter intended for long term retirement income. Both have always been and are solvent.

Over the past 2 years Consulting Company (1) has loaned Property Company (2) £800,000 from retained profits, which was used to purchase residential properties that are now tenanted. There is no interest being paid (currently at least, I had not really thought about it).

Option 1: Writing off the loan?
We do not want to keep Consulting Company (1) running long term solely to receive back its loan from Property Company (2), especially bearing in mind that the property company is intended to exist long term plus the money is tied up in tenanted property. Also, we would prefer the companies to be completely separated anyway in the unlikely event that a client makes a claim against the Consulting Company (1).

I hoped that Consulting Company (1) could write off the loan, however I have come to understand this may not be possible? We are happy to close Consulting Company (1) right away, although only if that was beneficial and the only way to achieve what is needed.
Or am I wrong that I cannot write off the loan?

Option 2: The only other option?

Assuming option 1 is a no go, the only other ‘solution’ I could think up is as follows:

a. Sell residential properties in Property Company (2) now
b. Property Company (2) repays the £800,000 loan to Consulting Company (1)
c. Close Consulting Company (1) claiming 14% Business Asset Disposal Relief in tax year 2025-26
d. I and my wife reinvest the (now reduced amount of) cash back into Property Company (2) as director loans to re-buy property, and pay stamp duty once again etc.

This option would be both a nightmare and very inefficient, but I cannot see an alternative? I realise with hindsight that I might have been naive.

Any tips, advice or pitfalls most welcomed.... really appreciated.

[AGoodman]

I don't know if option 1 works but there is a much simpler version of 2. Just wind up consulting company and distribute the benefit of the loan to the shareholders. Pay CGT on gains on the liquidation of the company.

You would want to check the BADR position, but that may also be an issue if the loan had been (recently) repaid and the company was holding £800k cash.

[wamstax]

Be careful with this as there are dangers with for example https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm36220. And there could be Targetted Anti Avoidance Rules that could make any distribution an income one as opposed a capital one.

[mandaris]

Thank you do much both of you for responding!

I just logged on to post a different question, and I just noticed that you had responded to my old one above. For some reason I never received a notification that anybody had responded, and I didn't think anyone would so had not checke.

AGoodman: amazing response, I had not thought of that and it makes sense for exploration. It could potentially save a big headache. Thank you.

wamstax: noted - I presume you are raising a concern that would exist if I took the route that AGoodman suggested? It seems fair and logical for a company to call in a loan or transfer its benefit before liquidation and claiming BADR or am I missing something? My interpretation of the tax manual link was not so great...