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Where Taxpayers and Advisers Meet

Beneficial loans

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm
Beneficial loans

Postby AGoodman » Mon Oct 21, 2019 6:11 pm

Company A lends money for less than the official rate to company B. Company B is 100% owned by a director of company A.

The director is not a participator in company A and there is a legitimate reason to lend the money to company B rather than the director himself (company B is buying a holiday home for director's use).

So far as I can tell, this is not directly caught by the beneficial loan rules as that covers loans to employees/officers or their relatives; it doesn't mention a connected company.

However, I find it hard to believe this arrangement doesn't trigger income tax. It could be the disguised remuneration rules?

Can anyone confirm that it is income tax free or suggest how it might be caught? I can do the research but I'm worried about unknown unknowns.

jerome.lane
Posts:237
Joined:Mon Aug 12, 2019 8:41 am
Location:Sandhurst, Berkshire
Contact:

Re: Beneficial loans

Postby jerome.lane » Tue Oct 22, 2019 9:14 am

Is company A somehow connected in some sort of way to company B or the director? If its truly arms length, then there's less or even no risk. A company lending to another company for 1% interest because it can only get 0.5% at the bank is a commercial arrangement. The directors of A should minute their rationale for making the loan. I assume the loan is secured.
Disguised remuneration anti avoidance is widely drafted and, although this arrangement doesn't immediately smack of replacing a salary on a common sense approach, it could get caught as a loan is being provided to a connected party; it just doesn't appear to be in return for services or from what you have disclosed, any sort of contrived arrangement.
As far as the living accommodation benefit in kind charge, there is an exemption for holiday homes outside the UK where company B only exists to hold the home and all its activities relate to the property. Otherwise there will probably be a BIK charge in point.
I would also consider whether this sort of arrangement could potentially get caught by s459 of the loan to participator rules. It's hard to see this applying if there's no association between all the parties.
I would tentatively say it should be regarded a a genuine commercial arrangement if there's no connection at all and there is a potential BIK charge kicking around.
Jerome Lane
Tax Adviser
Telephone: 07943 005902

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm

Re: Beneficial loans

Postby AGoodman » Tue Oct 22, 2019 10:05 am

Many thanks.

As you surmised, Director doesn't have an interest in Company A. Company B is actually an SCI set up to hold a French property so out of the country and does appear to be covered by the exclusion.

jerome.lane
Posts:237
Joined:Mon Aug 12, 2019 8:41 am
Location:Sandhurst, Berkshire
Contact:

Re: Beneficial loans

Postby jerome.lane » Fri Oct 25, 2019 8:34 am

So the only issue is whether the loan from Company A to Company B is actually for the benefit of the Director of B. I can't see disguised remuneration coming into play. There is probably some sort of association (?) between Company A, Company B and the Director? It's been a while since I dealt with France and French property but my understanding is that the UK authorities treat SCI's as opaque (like a partnership) and therefore it could be tentatively assumed that HMRC's view could be that the loan from Company A to B is actually a loan straight from A to the Director; and therefore within the benefits code if there is some sort of link (even if by a vague association or external relationship) between company A and the Director of B. Although the legalisation isn't clear, HMRC are very clear in their guidance that payments from third parties orchestrated by the employer could be caught. However, if HMRC are going to treat Company B as opaque, there's arguably no employment relationship as it's not a company in their eyes. They can't have their cake and eat it too! I think i would concentrate on the commerciality of the loan from A to B, ensuring that, if its not at ORI (or the French equivalent as that could be relevant here), it is secured and on what could be regarded as commercial terms. There's a risk there and the devil is in the detail although the real question is whether HMRC would actually take the point? Hopefully, they've got better things to do! It's an interesting one!
Jerome Lane
Tax Adviser
Telephone: 07943 005902


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