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  • Tax

    Intercompany loan & dividend between 2 LTD Co

    Hello - I have just setup a LTD company so that it can buy a flat & let it out. I have funds in a IT LTD company which I want to transfer to the Property LTD company so that it can buy the flat. Part of funds transferred will be via dividends & other via an intercompany loan. I am the sole director with 100% ownership in both companies

    1) For the Intercompany loan - Can the interest rate be set to 0% (ZERO) - will this raise any red flags with HMRC or is this OK? OR Does the interest rate have to be set to HMRC official rates i.e. 2.5%? OR Can the interest rate set to any % that I want e.g. 0.5% or 0.1%?

    2) Are there any S455 or S464A tax implications or will both of these not apply? If not, why not?3) Anything else of significance I should be aware of when setting up the loan e.g. restrictions on the term or can I choose any?

    3) For the Dividend - Will there be any dividend tax to pay in this scenario? If not, why not?

    The Property company owns a Alphabet share / Ordinary Class A share in the IT company.

    Thanks

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    I think you are over complicating the matter. It's usually a simple loan and little point in a loan agreement in my view. I cannot see the point in charging interest. Your only likely tax issue is that you have two companies so the large companies threshold (quarterly tax payments) is halved.
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    Chartered Accountant, Tax Advisor and Mortgage broker

    (and BTL portfolio owner)

    stuart@johnsonsca.com

    02039077022


    Thanks Stuart - Can you please expand on the "large companies threshold / quarterly tax payments is halved" bit? i.e. what does that mean in terms of impact? Is it the admin around the accounts for my accountant?  

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    The threshold is fairly high at £1.5m profits divided by the number of subsidiaries. If you own the company directly it won't bite.
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    Chartered Accountant, Tax Advisor and Mortgage broker

    (and BTL portfolio owner)

    stuart@johnsonsca.com

    02039077022

    If the IT Ltd Co (Trading Company) loans SPV Ltd Co (Investment Company) the money, does it lose the right to claim entrepreneurs relief when you close IT Ltd Co?

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    *Very* high level reply I got from my accountant - "It does create a tie between the companies that would need to be resolved when one is closed". I assume the Property co. will have to pay the loan off in full before the IT co. can claim Entrepreneurs' Relief / however I am not 100% / if anyone here knows, please confirm. 

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    You are saying it might lose ER because of the loan. I've assumed the loan is of surplus cash and so if ER was to be lost it would be lost anyway because of the scale of cash reserves making the business an investment business.

    It is more likely that ownership of the property shares would jeopardise ER but we don't know enough facts.
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    Chartered Accountant, Tax Advisor and Mortgage broker

    (and BTL portfolio owner)

    stuart@johnsonsca.com

    02039077022


    I was thinking more along the lines of ER is only applicable on Trading Companies and not Investment Companies, and so if you invest into the Investment Company you lose Trading company status?

    But I guess it also comes down to whether the 'loan' is treated as an investment or is indeed a loan? Like you say, not enough facts

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    A single small investment (loan or shares or property) is not necessarily enough to change a company from being trading to investment. It's all about scale - hence my comment re property subsidiary instead of loan. With a group you test the group not just topco.
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    Chartered Accountant, Tax Advisor and Mortgage broker

    (and BTL portfolio owner)

    stuart@johnsonsca.com

    02039077022


    Three Chartered Accountants have been happy for my IT company to loan money to my property company at any rate I like (I currently use 0%). I own 100% of all shares in both companies. There is no predefined term. It just gets entered into the accounts as a debtor/creditor due in more than 12 months.

    You will probably get a dividend exemption on the dividend but this might be complicated if the IT company also owns shares in the property company.

    How does the property company own shares in the IT company if you own 100% of both companies? Deciding whether S455/S464A applies is difficult as based on you owning 100%, it is a Close Company but you say your IT company owns some of the shares. Is there anyone else who owns shares?

    I would suggest you get your accountant(s) to tell you how they will be preparing your accounts at the year end or go to see a tax adviser.

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    Thank you - some good points there

    1) My bad - In terms of the shareholding - Property company owns a Alphabet share / Ordinary Class A share in the IT company and I own the rest of the shares (also Ordinary). I own 100% shares in the Property company. No one else owns any shares in either company. Both have me as their sole director.

    2) On the 0% interest rate - Any idea why this shouldn't be 2.5% / why is this allowed? i.e. given both LTD companies are separate entities in their own right, should there be a "fair" rate? Playing devil's advocate here so bear with me please as do not want to get stung down the line. Any official references to HMRC text / CTM would be handy to confirm with. I tried but unfortunately do not understand it clearly / perhaps not looking in the right places e.g. there are terms around "close companies", "connected companies", "participator/associate" e.g. see this - https://www.gov.uk/hmrc-internal-manuals...l/ctm61580

    3) Dividend exemption - thanks for the link however isn't this talking about a holding company & it's subsidiaries rather than just 2 LTD companies where one just owns a share in the other? Someone made a reference to "Franked investment income" however I could not find any official HMRC documentation that confirms this or alludes to this.

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