interest as trading or investment income
Discussion
my company is a general trading company.
Over the years the company has made loans to various other businesses. At the moment I've a couple outstanding.
I'm about the make another shortly - this time for a larger sum.
I'd obviously like this to count as a trading income, rather than investment. My accountant has told me that (basically) unless my business is a financial institution (ie, a bank), I'd have to treat this as investment activity.
I've been running nearly 20 years and had some form of lending out throughout most of this time.
would it help to put all lending into a new company (group / subsidiary set-up), would that help it qualify as a trade, if that all that entity did?
Over the years the company has made loans to various other businesses. At the moment I've a couple outstanding.
I'm about the make another shortly - this time for a larger sum.
I'd obviously like this to count as a trading income, rather than investment. My accountant has told me that (basically) unless my business is a financial institution (ie, a bank), I'd have to treat this as investment activity.
I've been running nearly 20 years and had some form of lending out throughout most of this time.
would it help to put all lending into a new company (group / subsidiary set-up), would that help it qualify as a trade, if that all that entity did?
No, but I already have other non trading income... rents etc ... that all together add up to more than the 25% often cited as the acid test for qualifying as a trading company.
I’m taking steps to sell and reduce the rents coming in, and was planning on using the funds to expand lending ... but if both are treated the same way, then I’ll have find another avenue
I’m taking steps to sell and reduce the rents coming in, and was planning on using the funds to expand lending ... but if both are treated the same way, then I’ll have find another avenue
https://www.gov.uk/hmrc-internal-manuals/capital-g...
Here is some guidance... HMRC define substantial to mean more than 20%... sorry, not 25.
I already have about that from rents... hence my point ref whether there is a way to ensure interest and the lending activities be treated as trading, and not investment.
Here is some guidance... HMRC define substantial to mean more than 20%... sorry, not 25.
I already have about that from rents... hence my point ref whether there is a way to ensure interest and the lending activities be treated as trading, and not investment.
isleofthorns said:
means if the company has too much investment income vs trading income, you won’t be able to qualify for entrepreneur’s relief to close it down or sell it, or business property relief if something happens to me - both of which are very different tax outcomes
It’ll be non trading. It’s not a statutory test, but HMRC deem 20% to be the threshold. They look at 3 things vis a vis trading and non trading;
- income
- assets on the balance sheet
- time spent earning the income
That’s the point.. I’d fail the income and asset thresholds...
Hence my query as to whether you can have interest as trading income, and what you’d need to demonstrate this
Ie, a company like esme loans.. they are not a bank, nor Fca. Offering business loans.... would that be considered trade? There are lots of these types of set ups that are not ‘financial institutions’...... surely they can’t all be considered investment companies?
Hence my query as to whether you can have interest as trading income, and what you’d need to demonstrate this
Ie, a company like esme loans.. they are not a bank, nor Fca. Offering business loans.... would that be considered trade? There are lots of these types of set ups that are not ‘financial institutions’...... surely they can’t all be considered investment companies?
isleofthorns said:
That’s the point.. I’d fail the income and asset thresholds...
Hence my query as to whether you can have interest as trading income, and what you’d need to demonstrate this
Ie, a company like esme loans.. they are not a bank, nor Fca. Offering business loans.... would that be considered trade? There are lots of these types of set ups that are not ‘financial institutions’...... surely they can’t all be considered investment companies?
What’s the main purpose of your company? It’s presumably not to lend money? In which case the income would be non trading. Hence my query as to whether you can have interest as trading income, and what you’d need to demonstrate this
Ie, a company like esme loans.. they are not a bank, nor Fca. Offering business loans.... would that be considered trade? There are lots of these types of set ups that are not ‘financial institutions’...... surely they can’t all be considered investment companies?
Like a lot of things with UK tax law, there is no hard and fast set of rules here - only interpretation based on the situation. HMRC's percentages are "working rules" rather than law and are open to discussion and interpretation depending on all other factors. However, based on the situation as described by you, your commercial activity is gradually sliding towards that of an investment operation rather than a true "trading" business so the ramifications for the fairly generous Entrepreneurs Relief could be significant.
Yes, it’s very hard to fit all the guidelines and not fall foul of something.
The reality is that most of the capital has been created over time from trading activities.... the non-trading has just happened along the way for various reasons...
Problem is, to employ money into trading is always a risk. My main markets have been in Africa, and whilst I’ve not had any significant issues, it’s a risky part of the world to do business, often the first to become affected when there is any global downturn.... I could expand back into it, but that would come at the cost of chasing turnover and taking risks.
Uk business is fraught with all sorts headaches, so having to go through the hassle to just employ funds with a view to closing in a compliant fashion, seems perverse.
The reality is that most of the capital has been created over time from trading activities.... the non-trading has just happened along the way for various reasons...
Problem is, to employ money into trading is always a risk. My main markets have been in Africa, and whilst I’ve not had any significant issues, it’s a risky part of the world to do business, often the first to become affected when there is any global downturn.... I could expand back into it, but that would come at the cost of chasing turnover and taking risks.
Uk business is fraught with all sorts headaches, so having to go through the hassle to just employ funds with a view to closing in a compliant fashion, seems perverse.
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