Liquidation loan account woes continued
3rd August 2018
Posted in Articles, Corporation Tax, Featured Articles, Private Client by Andrew Marr
The last Tax Bite prompted an unprecedented response from liquidator Tax Biters!
By way of quick recap, we were discussing a test case that HMRC have taken to argue that a director’s loan account which is distributed in specie should actually be taxed at dividend tax rates of up to 38.1% rather than much more beneficial capital gains tax rates which can be as low as 10% (and which is the ‘traditional’ treatment).
The take home message was that loans should not be distributed in specie as part of a liquidation until further notice.
Bridging loan
I suggested that one way of solving this problem would be to secure a bridging loan as follows:
- Assume company is owed £500,000 by a shareholder and is to be put into liquidation.
- Shareholder takes a £500,000 bridging loan and repays the company.
- Shareholder then receives the £500,000 as a normal cash distribution on liquidation.
- Shareholder repays the bank and the loan write-off point has been sidestepped.
Alternative solution
Rather than securing a loan for the full amount of the loan account which in practice could involve quite a lot of hassle and expense there is another solution which has been suggested by a few liquidators who are facing this issue in practice.
- Assume company is owed £500,000 by a shareholder and is to be put into liquidation.
- Shareholder scrabbles around to find £25,000 of cash.
- Shareholder pays off £25,000 of his loan account.
- This £25,000 is repaid as a liquidation distribution.
- Steps 3 and 4 happen another 19 times.
This means that a £500,000 loan has effectively been repaid using £25,000. This creates a bit of extra hassle for the liquidators who have to make more distributions but this cost is likely to be outweighed by the benefit of not having to go through the hassle of arranging a bridging loan.
