Avoid waiving shareholder credit accounts before a sale
8th May 2026
Posted in Articles by Andrew Marr
It is not uncommon for shareholders to lend personal funds to a company to allow it to meet various business expenses. Equally a buyer of a company usually wants to buy it free from shareholder debt. On a few occasions we have seen the proposal put forward by the buyer for the seller to waive the debt before a sale. This is generally a bad idea.
Example
Ronald McDonald is about to sell Burgers Ltd to Hamburglar Ltd. Burgers Ltd was set up by Ronald from scratch with negligible share capital. The company owes Ronald £1m which he lent it to buy various milkshake machines. The deal put forward by Hamburglar Ltd involves the following:
1. Ronald will waive his £1m debt.
2. Hamburglar Ltd will buy Burgers Ltd for £3m.
This is not very tax efficient because the £1m write off will give rise to a corporation tax charge of £250,000 in the accounting period that it arises. This is under the corporation tax loan relationship rules which generally follow the accounting treatment, and the waiver of the company’s debit will cause a £1m credit in the company’s profit and loss account. This will either be Hamburglar Ltd’s problem or (perhaps more likely) Ronald’s problem because it will be covered by warranties and indemnities regarding actions taken by him before the acquisition.
Furthermore, Ronald will not be able to claim any tax relief for the debt waiver. Relief for loans to trading companies under TCGA section 253 would not be available because the loan had not become irrecoverable.
Assuming that the £250,000 corporation tax charge gets shunted to Ronald through a warranty and assuming that he pays capital gains tax at 24% on the total proceeds (as reduced by the £250,000 warranty claim) then Ronald will have net after-tax proceeds of 76% of £2.75m, or £2.09m at the end of this deal.
Alternative structure
Because of the above issues, a much more sensible structure is as follows:
1. Hamburglar Ltd will buy Burgers Ltd for £2m (along with the debt to Ronald).
2. Hamburglar Ltd will also loan £1m to Burgers Ltd to allow it to immediately repay Ronald.
3. Perhaps the loan will be written off after the deal, but it could be left to run.
This would result in Ronald receiving £1m by way of loan repayment (which would suffer no tax) and £1.52m in post-tax proceeds from the £2m. That comes to £2.52m in total and £430,000 more than under the inefficient structure. If the loan made by Hamburglar Ltd to Burgers Ltd does get written off after the transaction, then the write-off would be tax neutral (no taxable credit in Burgers Ltd and no tax deduction in Hamburglar Ltd) due to the companies being connected.
Another alternative structure which would probably work would be for Ronald to convert his £1m debt into £1m share capital before the sale, and sell the company for £3m. He is still only taxed on a £2m gain.
Forbes Dawson view
We see quite a few ‘silly transactions’ regarding loan accounts. Another shocker is where the shareholder owes the company money and this is written off before a transaction. In such circumstances the individual will have effectively opted to be taxed at dividend rates on the loan write-off rather than the usually much lower capital gains tax rates. These sorts of costly mistakes should not arise with a reasonable amount of tax advisory input on the deal structure. This is all fairly simple stuff.
