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Taxing question of company loans in family property business

This month, the Croydon and South East London Tax Discussion Groups considered the tax position of a family business lending money to a close property company.

July 2019

The accountant explained that he had recently been engaged by a newly formed company ‘David Ltd’, which had been financed by his clients Andrew, Barbara and Colin. He explained that Andrew and Colin are brothers and that Barbara is their mother. The monies had been used by David Ltd to buy some offices in Greenwich which they intended to let out to third parties.

The family’s company loans to David Ltd had been borrowed based on the value of another commercial property in Bexleyheath, that they owned jointly. The accountant queried whether they would be able to charge interest on their loans, and more importantly whether they would be able to offset the mortgage interest that they were paying on the Bexleyheath property.

He also queried whether there should be any tax deducted on the interest payments on their company loans. 

Those attending the tax discussion group discussed whether there was any benefit to them from paying themselves interest on the property loans and covered the personal savings allowance. It was noted that the interest payments would reduce the company’s corporation tax liability. Furthermore, there should be an income tax deduction from the interest payments using form CT61, but such tax deductions would be recoverable in the personal tax self assessment of the recipients.

When looking at whether the interest being paid on the Bexleyheath loan would be an eligible deduction for their income tax, it was noted that there are strict criteria which need to be met under the legislation to permit such deductions. 

There is income tax relief available for interest paid on loans taken out by an individual in certain circumstances. One of these is where it enables an investment into a close company. 

The first condition is that this cannot be a loan to a close investment holding company. While the company which had received the loan was a close investment company (being the recipient of rental income from third parties), it was not letting the property to connected businesses.

Accordingly, the first condition was met for Andrew, Colin and Barbara.

The second condition is that the first condition must apply at the time the loan was taken out and when the interest was paid.

The final condition is that the investment must be either the acquisition of ordinary share capital in the close company or lent to the company to be used wholly and exclusively for the purposes of its business. 

Accordingly, it was felt that the interest would be allowable for each of the investors, but even if not available under these provisions it could alternatively be allowable against the commercial rents receive on the Bexleyheath property.

Each month, with the exception of July and August, the Tax Discussion Groups in Croydon & South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend and normally cover over a dozen tax issues raised by those attending.

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