Ltd company lending to private individual
Discussion
Hi all,
I am looking into my Ltd company lending someone unrelated to the business some money for just shy of a 50% return. The money is for them to do up their house and sell it. The house is worth over £600k, they have a mortgage 25% of the house value left to pay. I have been offered a charge over the property to cover monies lent. My Ltd company has no licence to lend money - is one needed or is this a straightforward investment opportunity? Any benefit of your experience will be gratefully received.
I am looking into my Ltd company lending someone unrelated to the business some money for just shy of a 50% return. The money is for them to do up their house and sell it. The house is worth over £600k, they have a mortgage 25% of the house value left to pay. I have been offered a charge over the property to cover monies lent. My Ltd company has no licence to lend money - is one needed or is this a straightforward investment opportunity? Any benefit of your experience will be gratefully received.
Im not fully up to date on credit rules - I'm sure someone else will clarify. But I'm thinking its along the lines of a private loan arrangement.
However, there are other issues that strike me.
1) Is it YOUR company - there are no other shareholders who have an interest in the business.
2) What do your Memorandum and Articles state about such a situation. It may be covered by the 'do anything ....'
3) 50% return. Sounds too good to be true. Even today's risk averse bankers would surely offer better rates if its such a good looking return.
4) Are you loaning your own cash - if its using money from your bank which is 'surplus' within your agreed facility you may be at risk with your bankers.
However, there are other issues that strike me.
1) Is it YOUR company - there are no other shareholders who have an interest in the business.
2) What do your Memorandum and Articles state about such a situation. It may be covered by the 'do anything ....'
3) 50% return. Sounds too good to be true. Even today's risk averse bankers would surely offer better rates if its such a good looking return.
4) Are you loaning your own cash - if its using money from your bank which is 'surplus' within your agreed facility you may be at risk with your bankers.
Answers in line below:
ClassicMercs said:
(1) Is it YOUR company - there are no other shareholders who have an interest in the business - My co-director and the only other shareholder are considering doing this.
2) What do your Memorandum and Articles state about such a situation. It may be covered by the 'do anything ....' - No problem - we 'are' the company
3) 50% return. Sounds too good to be true. Even today's risk averse bankers would surely offer better rates if its such a good looking return. - My thoughts exactly!! He has a lot of equity in the property on paper. There would be a lot of due dilligence on our lawyer's part.
4) Are you loaning your own cash - if its using money from your bank which is 'surplus' within your agreed facility you may be at risk with your bankers. - We would be loaning from the Ltd company's account, we would still be still cash rich with no debt and looking for other investments too.
In short, my major concern is whether it is illegal to lend someone money for profit without a licence. The other concern is should we take a charge on the property (second in line to the bank no doubt) is there still a risk of not getting paid when the property is sold? Thanks for your post.2) What do your Memorandum and Articles state about such a situation. It may be covered by the 'do anything ....' - No problem - we 'are' the company
3) 50% return. Sounds too good to be true. Even today's risk averse bankers would surely offer better rates if its such a good looking return. - My thoughts exactly!! He has a lot of equity in the property on paper. There would be a lot of due dilligence on our lawyer's part.
4) Are you loaning your own cash - if its using money from your bank which is 'surplus' within your agreed facility you may be at risk with your bankers. - We would be loaning from the Ltd company's account, we would still be still cash rich with no debt and looking for other investments too.
I would be more converned with the thought that you might be seen as an investment or development company by HMRC, depending on how much you are lending/investing.
Last year we had the equivilant of 2 years tunover on investment at a time when our general business turnover had dropped significantly and our accountant was concerned HMRC would see us, not as the core business, but as an investment company. I think he was over reacting given it was only for a year but he was much happiwer when we cashed in some of the invested money and took it as dividends.
Eric Mc (or your own accountant) is your man.
Last year we had the equivilant of 2 years tunover on investment at a time when our general business turnover had dropped significantly and our accountant was concerned HMRC would see us, not as the core business, but as an investment company. I think he was over reacting given it was only for a year but he was much happiwer when we cashed in some of the invested money and took it as dividends.
Eric Mc (or your own accountant) is your man.
I think you're likely to fall foul of the consumer credit act, and thus will need a licence.
Check out this link for further details.
http://www.oft.gov.uk/OFTwork/credit-licensing/cre...
Check out this link for further details.
http://www.oft.gov.uk/OFTwork/credit-licensing/cre...
Four Coffee is correct. If a company moves away from its core trading activity and starts receiving a large portion of its income from an "investment" type operation (such as rents or interest), then it could be reclsssified as an Investment Company rather than a Trading Company for Corporation Tax purposes.
The problem is that small trading companies pay Corporation Tax at 21% whereas Investment Companies pay Corporation tax at 28%.
There could also be problems obtaining loss relief if the company's profitr or loss has been generated by a mixture of trading and investment activity.
You say that thne individual to whom the company is intending to lend the money is not "related". You will need to check up on the definition of the term "Connected Person" as set out in the new 2006 Companies Act to determine if the person really is "Connected" and therefore whether separate disclosure of the terms and conditions and balance of the loan plus detailed breakdown of the balance in the balance sheet each year.
Finally, HMRC also require discloure of loans made by companies to certain classes of peiople under the Benefit in Kind rules although with the high rate of interest you intend to charge this individual I don't think that this would be an issue in this case.
The problem is that small trading companies pay Corporation Tax at 21% whereas Investment Companies pay Corporation tax at 28%.
There could also be problems obtaining loss relief if the company's profitr or loss has been generated by a mixture of trading and investment activity.
You say that thne individual to whom the company is intending to lend the money is not "related". You will need to check up on the definition of the term "Connected Person" as set out in the new 2006 Companies Act to determine if the person really is "Connected" and therefore whether separate disclosure of the terms and conditions and balance of the loan plus detailed breakdown of the balance in the balance sheet each year.
Finally, HMRC also require discloure of loans made by companies to certain classes of peiople under the Benefit in Kind rules although with the high rate of interest you intend to charge this individual I don't think that this would be an issue in this case.
In terms of needing a CCA licence, there are quite a few exceptions and the OP should have a nose around the Act.
For instance, could the debtor certify (in the required prescribed form) he is a high net worth individual? From memory this requires a £150k pa income and/or £500k net assets - would need to check the exempt agreements order though.
I agree with Eric re: Connected Persons, that should be checked.
For instance, could the debtor certify (in the required prescribed form) he is a high net worth individual? From memory this requires a £150k pa income and/or £500k net assets - would need to check the exempt agreements order though.
I agree with Eric re: Connected Persons, that should be checked.
russy01 said:
do it, your accountant will pick up the pieces!!
Dumb advice - if you don't mind me saying so."Picking Up the Pieces" could involve the company having to pay Section 419 Corporation Tax which it may not be able to afford or the ditrectors could end up being stung for a PAYE Benefit in Kind on the beneficial loan balance.
Edited by Eric Mc on Thursday 13th May 13:12
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