Tax payable on return of director’s loan?

by Readers Question

0:11 AM, 23rd April 2020
About 7 months ago

Tax payable on return of director’s loan?

Make Text Bigger
Tax payable on return of director’s loan?

My wife and I own buy to let properties both personally and through our limited company.

Following a sizeable development within the company, we were owed £300000 in directors’ loans. We had financed the project with personal money lent to the company.

We decided that two of the flats that we had created (an old pub) would be transferred to us personally in partial repayment of directors’ loan. We referred this to our accountant as it was the first time we had encountered having to make a directors’ loan to our company or try to get it repaid to us.

The accountant said that we would have to buy the two flats at market rate (£125000 each).

We had to pay 20% corporation tax on the profit made by the company on sale of the two flats to us. The cost to buy and renovate was £85000 per flat realising a profit of £40000 each.

So I have a question I would like some input on please:
Did I have to pay corporation tax on the sale of the flats to us personally. I have read that return of directors’ loans does not attract tax but I don’t know if this can be in the form of property.

All comments and advice gratefully received.

Thanks

Phillip

Response from Mark Alexander

Hi Philip

There is a big difference between accountancy and tax planning.

If you have already completed these transactions, then I’m afraid you have learned this the hard way.

Accountants present what has already happened in the most tax efficient and compliant way.

Tax planners help you consider the optimal solution BEFORE you make your decisions.

Your accountant is pretty much correct in everything he has told you, save for the fact that the rate of corporation tax is actually 19%, NOT 20%.

YOU haven’t actually paid any tax at all on the partial repayment of your Directors Loan. Instead, your company crystallised a profit by selling the two properties to you. If, as you say, each property cost £85,000 to build and was transferred to you at full market value of £120,000 for each property (which is absolutely the correct way to record such transactions), then 19% tax on that crystallised profit within the company has cost £13,300, i.e. £70,000 X 19% = £13,300. Furthermore, you have reduced your loan account balance to just £60,000.

Presumably, you also paid the 3% additional rate of Stamp Duty on the properties personally? If not, then I’m afraid you have another nasty shock still to come. Oh, by the way, the two transactions are connected for SDLT purposes too, but at least you have the benefit of Multiple Dwellings Relief.

Did you consider the alternatives?

You may have been able to repay £180,000 of your directors loan without either you or the company having to pay any tax at all.

The company might have been able to borrow 75% of the value of each property, so that’s £90,000 X 2 = £180,000.

The company would pay no tax on this transaction and would have the full £180,000 in cash available to pay you that money back to you in part repayment of the £300,000 you loaned to it. You would pay not any tax at all on that loan repayment. You would also have a further £120,000 due to you from the company, i.e. double the amount you have now.

Sorry, more bad news!

You may also have stored up another another potential problem for yourself as a result of transferring those properties into your own personal name. If you ever need to borrow against those properties, to fund another project for instance, you will not be able to offset your finance costs against your rental income. This would not have been a problem for for your Limited Company, because the restrictions on finance cost relief only applies to private individuals, NOT to Limited Companies.

Lesson learned?

PS – without wishing to rub too much salt into your wounds, a tax planning consultation with Property118 would have cost you just £400. It’s too late for these transactions but we might be able to help you to structure your business more effectively moving forwards.

Show Form To Book A Tax Planning Consultation
Consultations include new client compliance checks, fact find via email with complimentary software, expert analysis, a detailed written report and recommendations and a recorded video conference with your Property118 Consultant and our Hon. Legal Counsel, which your existing advisers are welcome to participate in. All consultations are confidential and you will be provided with a copy of the recording of the video conference. We GUARANTEE total satisfaction or a full refund.
  • Please provide an overview of your circumstances and what you are looking to achieve.

Share this article

Twitter Facebook LinkedIn

Comments

Phil

21:15 PM, 23rd April 2020
About 7 months ago

Thank you 🙁

Mark Alexander

22:48 PM, 23rd April 2020
About 7 months ago

Reply to the comment left by Phil at 23/04/2020 - 21:15
Sorry about that Phil, but you need to chalk this up to experience and move on.

I’d like our tax team will be identify more in savings than you have lost as a result of this “learning experience” if you book a tax consultation. Will you be doing that?

Trevormlazenbury@aol.co.uk

10:06 AM, 30th April 2020
About 7 months ago

Whilst I am not aware of the dates or timelines involved, your ages, what the profits are in the subsequent period or the value of your pension pots or the value of the pension contributions you make each year.
However did you consider:
- paying loan interest to yourselves ?
-making a company contribution to a pension in particular a SSAS even if it is in the following company tax year. As that and perhaps voting a bonus, if you were able to generate a trading loss you maybe able to carry it back to the previous accounting period.

Kam Clare

21:49 PM, 30th April 2020
About 7 months ago

Hi

Can you tell me who the accountant who dealt with this query is? I am a portfolio landlord looking for tax advice.

Mark Alexander

22:01 PM, 30th April 2020
About 7 months ago

Reply to the comment left by Kam Clare at 30/04/2020 - 21:49
Hi Kam

I am the person who replied to explain how this matter could have been structured without tax.

To book a consultation, please see >>> https://www.property118.com/tax/book-a-consultation/


Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

Chancellor cuts housing support

Landlord incorporation and tax planning presentation

Landlord incorporation and tax planning presentation

The optimal ownership structure for UK landlords

The optimal ownership structure for UK landlords

Landlord Incorporation Specialists

Landlord Incorporation Specialists

Incorporation relief and latent gains explained

Incorporation relief and latent gains explained

Incorporating your property portfolio without having to refinance

Incorporating your property portfolio without having to refinance

Landlord Incorporation Strategies – Update for 2020

Landlord Incorporation Strategies – Update for 2020

Capital Account Restructure – Case Study

Capital Account Restructure – Case Study

What Does “Washing Out CGT On Incorporation” Actually Mean?

What Does “Washing Out CGT On Incorporation” Actually Mean?

Stamp Duty when transferring the ‘whole business’ of a Partnership into a Limited Company

Stamp Duty when transferring the ‘whole business’ of a Partnership into a Limited Company

Software to analyse the viability of transferring a property rental business into a Limited Company

Software to analyse the viability of transferring a property rental business into a Limited Company

Inheritance tax and legacy planning for property company owners

Inheritance tax and legacy planning for property company owners

HMRC Internal Manuals ‘Landlord Incorporation’

HMRC Internal Manuals ‘Landlord Incorporation’

On-demand webinar explaining the uses of Limited Liability Partnerships “LLP’s” for landlord tax planning

On-demand webinar explaining the uses of Limited Liability Partnerships “LLP’s” for landlord tax planning

Guide for landlords on forming an LLP for property investment

Guide for landlords on forming an LLP for property investment

LLP structure reduces landlords tax bill by 85% – CASE STUDY

LLP structure reduces landlords tax bill by 85% – CASE STUDY

Partnership taxation and associated rules

Partnership taxation and associated rules

Business continuity and succession planning for landlords

Business continuity and succession planning for landlords

Property valuations for tax planning purposes cost just £19.95 each

Property valuations for tax planning purposes cost just £19.95 each

Hybrid Tax Structure – Landlords BEWARE!

Hybrid Tax Structure – Landlords BEWARE!

Tax Planning Bodge Jobs – Limited Liability Partnerships “LLP’s”

Tax Planning Bodge Jobs – Limited Liability Partnerships “LLP’s”

Landlords Tax Planning Bodge Jobs – inter company lending

Landlords Tax Planning Bodge Jobs – inter company lending

Book A Consultation

Book A Consultation

A Landlord’s Tax Planning Disaster

A Landlord’s Tax Planning Disaster

Just say NO to tax avoidance “schemes”

Just say NO to tax avoidance “schemes”

Using a property investment LLP for school fees planning purposes

Using a property investment LLP for school fees planning purposes

LBTT for sole owner landlord incorporation in Scotland

LBTT for sole owner landlord incorporation in Scotland

Stamp Duty relief on properties split into multiple dwellings

Stamp Duty relief on properties split into multiple dwellings

Expat Landlords Tax Planning Opportunity

Expat Landlords Tax Planning Opportunity

Open A Business Bank Account In Minutes

Open A Business Bank Account In Minutes

Why we don’t apply a ‘one-size-fits-all’ approach to landlord tax planning

Why we don’t apply a ‘one-size-fits-all’ approach to landlord tax planning

Four Property Investment Structures – Video Interview

Four Property Investment Structures – Video Interview

Smart Property Company Structures

Smart Property Company Structures

UK GOVERNMMENT 2021 CGT REVIEW PROPOSALS

UK GOVERNMMENT 2021 CGT REVIEW PROPOSALS

The Landlords Union

Become a Member, it's FREE

Our mission is to facilitate the sharing of best practice amongst UK landlords, tenants and letting agents

Learn More