Tax Forum :: Free Tax Advice

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!)

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?

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

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....?

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