Tax Planning Bodge Jobs – inter company lendingMake Text Bigger
Having shared a Tax Planning case study on Facebook recently I have been amazed by the responses which show how many landlords have bodged their tax planning in regards to lending money from their trading company to their property company.
The problem with such a structure is that in the event of the trading company failing, it’s creditors can call upon the property company to repay the loans. The result of this is that the entire structure can collapse like a ‘house of cards’.
The reasons they do this are:-
- So they don’t have to pay tax on dividends from their trading company to reinvest into property
- Because mortgage lenders don’t like lending to trading companies
- To avoid being affected by the restrictions of finance cost relief when borrowing in a company name
I posted a case study on several Facebook groups with a link to the correct structure, which the Property118 Tax Team and Mark Smith at Cotswold Barristers published for the purposes of sharing best practice. However, several landlords read the case study and responded before reading the linked article to explain the optimal structure. These landlords then published the “Bodge Job” version of the solution described above. This experiment proved many of my theories, as follows:-
- People rarely understand the full picture
- A little knowledge can be incredibly dangerous
- Intentions to be helpful in Facebook groups can often result in very poor quality advice
- Those seeking or offering advice on tax related matters within Facebook groups put themselves and others in jeopardy by trying to be helpful or by cutting corners as a result of trying to save money on paying professional fees
The correct structure is actually triangle shaped, with a Holding Company inserted between the trading company and the property company.
The shares in the trading company are exchanged for shares in the holding company. This allows dividends to flow upwards without taxation. This is because dividend tax only falls due if the dividends end up in the hands of the shareholders personally. Within the correct structure, the holding company owes nothing to the trading company but has control of the cash it has generated. Therefore, if the trading company fails, the cash or assets of the holding company are significantly less likely to be exposed to claims from creditors of the trading company.
The holding company can simply hold the cash or lend it to its other subsidiary, i.e. the property company. Where this occurs, if the property company fails the only loss is to the Holding Company, i.e. the loans it has made cannot be repaid. Importantly though, the trading company is unaffected.
To read a case study and the solution we recommended please CLICK HERE
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There will never be an optimal ‘one-size-fits-all’ business structure for tax purposes. The presentation below provides a useful overview of some of the options you might like to discuss with us.
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