Company providing security for a director's loan
Discussion
Morning all
I am out of the office today, so no access to any notes. Can anyone clarify the position, or point me in the direction of the HMRC legislation which governs the above?
In short, Company A has cash it does not need (at present). One of the directors is buying a house. Rather than take a mortgage, the director could obtain a loan from his bank secured by a charge of deposit over the company's funds at a VERY fine margin.
What are the tax implications here for the director? Benefit in Kind? The company would earn a greatly reduced rate of interest, but I guess that's no different to the company having their funds in a current accoutn compared to a deposit account.
I know there are restrictions around loans to directors, but in this case the company is only pledging it's support.
I am out of the office today, so no access to any notes. Can anyone clarify the position, or point me in the direction of the HMRC legislation which governs the above?
In short, Company A has cash it does not need (at present). One of the directors is buying a house. Rather than take a mortgage, the director could obtain a loan from his bank secured by a charge of deposit over the company's funds at a VERY fine margin.
What are the tax implications here for the director? Benefit in Kind? The company would earn a greatly reduced rate of interest, but I guess that's no different to the company having their funds in a current accoutn compared to a deposit account.
I know there are restrictions around loans to directors, but in this case the company is only pledging it's support.
No. The funds will always remain in the name of the company. The Director will be given a loan, secured by a third party charge over the deposit via a charge of deposit.
In order to maximize the benefits, rather than paying the company interest on the deposit (which is therefore taxable). They will simply charge the director a lower rate.
e.g. let's say the company normally earns 2% for their deposit. The bank want to make a 0.5% margin, so would need to charge the director 2.5%. As the company will pay tax on the 2% this widens the cost to the company and director as they are having to cut in HMRC.
Instead, the company will place the funds in a nil interest bearing account (so they are forefitting interest). As the bank are not having to pay out 2% to the company, they can pass this on to the director by charge charging 0.5%.
In order to maximize the benefits, rather than paying the company interest on the deposit (which is therefore taxable). They will simply charge the director a lower rate.
e.g. let's say the company normally earns 2% for their deposit. The bank want to make a 0.5% margin, so would need to charge the director 2.5%. As the company will pay tax on the 2% this widens the cost to the company and director as they are having to cut in HMRC.
Instead, the company will place the funds in a nil interest bearing account (so they are forefitting interest). As the bank are not having to pay out 2% to the company, they can pass this on to the director by charge charging 0.5%.
MRSNEAK said:
Yes. Cash will always be held in a deposit account in the company's name, however they are allowing the director to use this to secure personal borrowing.
Therefore the director's borrowing is from an outside source - such as a bank.First of all, I would check that the company is allowed to do this under its Memorandum and Articles of Association.
Secondly, I would want to make sure that the other shareholders and directors are appraised of your intentions BEFORE such a step is taken.
Thirdly, if the company goes ahead with this, there will be reporting requirements that will need to be met regarding disclousre notes to the annual accounts filed at Companies House.
Fourthly, there will probably be a need to file a notice at Companies House that the company has a standing charge over one of its assets (i.e. a charge on the cash in its deposit account).
From a tax point of view, I don't think that there are any real implications. The company in itself is not providing a cash loan to the director, so there are no P11D "Benefit in Kind" issues. Also, as there is no actual loan to the director, there should be no Section 419 Corporation Tax to pay.
Obviously, chat through these issues with your accountant.
Eric Mc said:
MRSNEAK said:
Yes. Cash will always be held in a deposit account in the company's name, however they are allowing the director to use this to secure personal borrowing.
Therefore the director's borrowing is from an outside source - such as a bank.First of all, I would check that the company is allowed to do this under its Memorandum and Articles of Association.
Secondly, I would want to make sure that the other shareholders and directors are appraised of your intentions BEFORE such a step is taken.
Thirdly, if the company goes ahead with this, there will be reporting requirements that will need to be met regarding disclousre notes to the annual accounts filed at Companies House.
Fourthly, there will probably be a need to file a notice at Companies House that the company has a standing charge over one of its assets (i.e. a charge on the cash in its deposit account).
From a tax point of view, I don't think that there are any real implications. The company in itself is not providing a cash loan to the director, so there are no P11D "Benefit in Kind" issues. Also, as there is no actual loan to the director, there should be no Section 419 Corporation Tax to pay.
Obviously, chat through these issues with your accountant.
Just be very wary about entering into such arrangements.
You are comnpromising the company's integrity as a trading entity in order to support personal (non-company related) debts. Those who deal with your company are legally entitled to know that you have placed such a burden on the company's balance sheet.
As I mentioned above, you are entering into a whole realm of onerous disclure requirements and bureaucratic obligations under Company Law.
You are comnpromising the company's integrity as a trading entity in order to support personal (non-company related) debts. Those who deal with your company are legally entitled to know that you have placed such a burden on the company's balance sheet.
As I mentioned above, you are entering into a whole realm of onerous disclure requirements and bureaucratic obligations under Company Law.
I should perhaps also add for those considering such a transaction, that in this case the company concerned is very large and so the restrictions on this cash will not affect them at all, there are specific reasons why the client would prefer for the funds to stay within the company for now.
MRSNEAK said:
I should perhaps also add for those considering such a transaction, that in this case the company concerned is very large and so the restrictions on this cash will not affect them at all, there are specific reasons why the client would prefer for the funds to stay within the company for now.
All the more reason for ensuring that the director is not acting "ultra vires".Eric Mc said:
MRSNEAK said:
I should perhaps also add for those considering such a transaction, that in this case the company concerned is very large and so the restrictions on this cash will not affect them at all, there are specific reasons why the client would prefer for the funds to stay within the company for now.
All the more reason for ensuring that the director is not acting "ultra vires".Do you mean "paid to him as dividends"?
The bank's due diligence will be to cover THEIR legal requirements - not the company's. The directors of the company MUST - by law - act in the best interest of the company, not themselves personally.
Are the directors the same people as the shareholders?
Are there some non-director shareholders?
What about minority interests?
The bank's due diligence will be to cover THEIR legal requirements - not the company's. The directors of the company MUST - by law - act in the best interest of the company, not themselves personally.
Are the directors the same people as the shareholders?
Are there some non-director shareholders?
What about minority interests?
Eric Mc said:
Do you mean "paid to him as dividends"?
The bank's due diligence will be to cover THEIR legal requirements - not the company's. The directors of the company MUST - by law - act in the best interest of the company, not themselves personally.
Are the directors the same people as the shareholders?
Are there some non-director shareholders?
What about minority interests?
I don't know (at this stage) what the structure will be for the drawings.The bank's due diligence will be to cover THEIR legal requirements - not the company's. The directors of the company MUST - by law - act in the best interest of the company, not themselves personally.
Are the directors the same people as the shareholders?
Are there some non-director shareholders?
What about minority interests?
The bank's due dilligence will also need to ensure that the company has met their requirments, otherwise their security could be challenged.
There are only three shareholders (one of which is a director, a director, and an employee trust) but numerous other directors - this is a BIG business.
Agree completely with Eric's comments immediately above but I wouldn't discount the tax side of things completely. This arrangement might well result in the director being subject to a tax charge on the provision of a beneficial loan: i vaguely recall that 'making a beneficial loan' can include 'guaranteeing a loan'.
Worth asking the legions of well paid advisor to check anyway.
Worth asking the legions of well paid advisor to check anyway.
Edited by coletrickle01 on Friday 29th July 13:17
coletrickle01 said:
I wouldn't be discount the tax side of things completely. This arrangement might well result in a tax charge as a beneficial loan: i vaguely recall that 'making a beneficial loan' can include 'guaranteeing a loan'.
Worth checking further anyway.
That did cross my mind.Worth checking further anyway.
That is why ALL the implications of entering into such an arrangement need to be investigated.
After all, the director is going to receive a "benefit" directly linked to the fact that he is a director of the company. How you value that "benefit" for tax purposes may be difficult, but I'm sure HMRC would like to know what is going on - and that is one of the reasons why the Companies Act requires a detailed disclosure note to be made in the formal accounts.
Gassing Station | Finance | Top of Page | What's New | My Stuff