Buying out director from ltd company can you help ?

[lexi 1]

The initial message was deleted from this topic on 25 January 2018 at 19:36

[lexi 1]

Eric Mc said:

So - does this new director now have an overdrawn director's loan account? No

If he does, what is the size of the balance he owes back to the company?

What date did the loan account become overdrawn?

How does he plan to repay the money back to the company? no idea yet

Has he paid back any money yet? No

Does your brother not have an accountant working this for him and giving him advice on the matter? yes my mate wanted a second opinion

It's impossible to make any definitive statements when the information given is so sketchy.

[lexi 1]

Alpinestars said:

So he's already had a loan from the company?

Yes

[lexi 1]

Eric Mc said:

You answered "No" to my question about whether the director now has an overdrawn loan account.

My hunch is that you don't really know what I mean by "an overdrawn director's loan account".

This is when a company lends money to one of its directors.

This sounds to me EXACTLY what the situation is.

HMRC does not like overdrawn director's loan accounts and will hit the company or the individual for tax if the situation is not corrected.

As I mentioned earlier, if he owes more than £10,000 to the company AND the company is not charging him a proper rate of interest on the loan, he will be deemed to have obtained a "Beneficial Loan" from the company and he will be taxed under the PAYE Benefit in Kind system accordingly.
This needs to be returned under payroll regulations - currently by filing a Form P11D at the end of the tax year.

And, as I also mentioned earlier, the company MIGHT have to pay a penalty Corporation Tax charge on the unpaid balance of this loan if it remains unpaid more than 9 months after the end of the company's financial year end date. As Alpinestars said, if this Section 455 Corporation Tax has to be paid to HMRC, they will refund it to the company once the company can show that the loan has been cleared.

However, this can be a long drawn out process and it is best not to get into that situation in the first place.

Hi Eric

Thank you for the reply's I know your only trying to help I guess the loan account must be over drawn then have you seen this type of situation before there was no choice but get rid of the other shareholder asap as it would of ended the company he had no choice but get the loan in the company name as he had no surplus cash to raise the money privately is there anyone at HMRC that could advise him ? or will they just take a dim view on it all

thanks again Lexi

[lexi 1]

Eric Mc said:

I have seen plenty of overdrawn loan accounts over the years and they can be a real pain to resolve. I have to say, in most cases they have been nowhere near as big as the one your brother seems to have arranged for himself.

He needs to sort the situation as quickly as he can because it could have serious effects on both him and the company.

Thanks for the advise if a client came to you and was in the situation what is the best way out of it ?

Did you see my question about asking HMRC ?

[lexi 1]

Eric Mc said:

A dividend CAN be used to sort a loan account out but, as ever, there are lots of things to consider first -

Are there sufficient profits/reserves in the company to allow a dividend to be paid? If there aren't, then the dividend required will not be payable in full - or perhaps not at all.

What about the other shareholders (if there are any)?

Dividends are paid to individuals as a share of the company profits based on the number of shares held by each shareholder. If one shareholder needs a "special" dividend to fix their loan account, the other shareholders are also entitled to a similar dividend. This of course, compounds the problem of adequate reserves. The only way around this is to have the other shareholders sign a waiver giving up their entitlement to the dividend. They may not agree to this.

And, as ever, HMRC are not always keen on dividend waivers especially if they see that the waiver is really a dodge to allow an individual director/shareholder fix a problem.

When paying dividends, it is expected that the right procedures are followed by the company BEFORE the amount is paid -

review of company accounts

ascertaining of distributable reserves

minuted decision of directors to issue a dividend

waivers approved and signed by any shareholders waiving their dividend

issue of dividend vouchers

Thanks again for such detailed reply's all of you

Not sure what reserves/profits are in the company but will ask

The only other share holder is his wife who has a v small amount and just wants the best way out of the situation so no issues there ,the only other thing he has thought of is if he was to get a loan personally for the full amount (he would have to put his property on the line as a guarantee which his wife is happy with)

Just trying to think of other ways around it or just suck it up and pay the tax he would owe if it was left as is.