Your company can’t afford to repay the money you lent it a few years ago and you’re considering waiving the debt. The trouble is this can trigger additional tax bills. How can these be avoided?
Funding your company
One way to fund a start-up is to lend the company money. You could instead provide the finance as share capital but loans are more flexible because you can get your money back without much admin and with no tax consequences. The trouble is a loan shows as a creditor in the company’s balance sheet which technically might leave it insolvent. Not only does this look bad it can affect the company’s ability to trade. The simple solution would seem to be to waive all or part of the loan but this comes with some nasty tax consequences.
Corporation tax
If you waive any part of a loan you’ve made to your company it counts as its income. In the case of a loan, whether it’s a formal one or simply a credit balance on your director’s loan account, it’s taxed under the loan relationship rules. These are separate from the normal corporation tax (CT) rules but the outcome is the same; your company must pay CT at the normal rate (currently 19% rising to 25% from 1 April 2023). This means there’s a tax cost for simply giving up your right to the money you’re owed by your company.
Loan relationships and insolvency
There are a several get-outs from the loan relationship regime. These include waiving a debt where the company owing the money is insolvent. There are tough conditions involved with this exception to the rule. The good news is that there’s a an alternative to prevent the loan waiver from counting as a loan relationship charge (usually referred to a loan relationship credit). Tip. Swapping your loan for more shares in the company can prevent the loan relationship regime charge from applying and so the CT bill is avoided. Naturally, if there are other shareholders you’ll need their agreement to you taking more shares in the company.
Other tax issues – IHT
There can also be an inheritance tax (IHT) side effect of waiving a loan but not if you’re the only shareholder, or the only other one is your spouse or civil partner. In other cases, because the value of the company, and thus its shares, increases because it no longer has to repay the loan all shareholders benefit from your generosity. Where this happens the IHT rules say that the loss in value to your estate counts as an IHT potentially exempt transfer (PET) to each of the other shareholders. For example, if you waived a loan of £30,000 and your company’s value increased by the same amount and you owned the company jointly with one other shareholder, your estate would reduce by £15,000 and theirs will increase by the same amount. You’ve made a PET of £15,000 meaning that if you died within the following seven years it would be taken into account when calculating IHT.
CGT loss. Another tax consequence of waiving a loan is that you might be entitled to claim capital gains tax loss relief, providing conditions are met.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.