Directors loans at sale of business
Discussion
A friend (yes honestly) is selling her business after a fall out with her co-director. The business is being sold as a going concern, building lease, equipment, company cars and good will, but without the significant debts, which I presume will come out of the proceeds before the remained is divided up between the 2 of them based on their shares.
The co-director is claiming that a few years ago he took out a loan and lent it to the company as a directors loan. In return my friend says she also lent money from family to keep the business afloat.
In terms of 'who gets what' from the sale proceeds, what comes first, directors loans (and do they have to have board minutes or records agreeing the loans) or the other creditors?
There is a suspscion they both bought company cars with the money which are now worth diddly-squat on the books, but I guess the loans are still shown as unpaid.!
Director's Loan Accounts. DLAs.
These should show up on the accounts by individual director. That amount (if possible) should be withdrawn from the business and paid back to the director prior to anything else happening. A Director's Loan Account has tax-free money in it. Either because the Director injected the cash into the business and it was tax paid at that point or because, for example, the director paid the income tax/dividend tax ccomponent of a payment BUT left the remaining tax paid money in the business.
So. The key to resolving any discord is that the accounts are of good enough quality to correctly identify any such tax-paid money left in the business. If the business doesn't have enough cash on hand to pay off these loans then it will either have to be done in stages or written off. But if the business *does* have cash it makes sense to withdraw any DLA money first prior to anything else...as its tax paid already.
On the other hand if the business has been loaning money to the directors this also goes into the DLA. As a negative. The Revenue takes a dim view of negative DLAs - and will slap a commercial rate of interest as a benefit in kind on the director's tax bill. It is also illegal IIRC to have a total negative status with respect to all the DLAs at year end. i.e. One director is owed money, the other owes money. So long as the total owed to the Company is less than the total owed to the Directors all is well. If not then the Company has (in effect) paid Directors money without paying tax. As you might guess the Revenue *really* dislike this and there will be shit.
If the bought Company Cars with the money this is irrelevant. Except that they may choose to accept the Company cars in part payment of the DLA...
These should show up on the accounts by individual director. That amount (if possible) should be withdrawn from the business and paid back to the director prior to anything else happening. A Director's Loan Account has tax-free money in it. Either because the Director injected the cash into the business and it was tax paid at that point or because, for example, the director paid the income tax/dividend tax ccomponent of a payment BUT left the remaining tax paid money in the business.
So. The key to resolving any discord is that the accounts are of good enough quality to correctly identify any such tax-paid money left in the business. If the business doesn't have enough cash on hand to pay off these loans then it will either have to be done in stages or written off. But if the business *does* have cash it makes sense to withdraw any DLA money first prior to anything else...as its tax paid already.
On the other hand if the business has been loaning money to the directors this also goes into the DLA. As a negative. The Revenue takes a dim view of negative DLAs - and will slap a commercial rate of interest as a benefit in kind on the director's tax bill. It is also illegal IIRC to have a total negative status with respect to all the DLAs at year end. i.e. One director is owed money, the other owes money. So long as the total owed to the Company is less than the total owed to the Directors all is well. If not then the Company has (in effect) paid Directors money without paying tax. As you might guess the Revenue *really* dislike this and there will be shit.
If the bought Company Cars with the money this is irrelevant. Except that they may choose to accept the Company cars in part payment of the DLA...
From what Leftie said, it seems the company owes money to the directors. The sticking point is getting the two resigning directors to agree to the respective amounts they are owed. That is why I asked about the figures that had been shown in the accounts. After all, the directors agree and sign off the accounts, so, in theory, should have agreed the values of the loan accounts.
Eric Mc said:
From what Leftie said, it seems the company owes money to the directors. The sticking point is getting the two resigning directors to agree to the respective amounts they are owed. That is why I asked about the figures that had been shown in the accounts. After all, the directors agree and sign off the accounts, so, in theory, should have agreed the values of the loan accounts.
Indeed. This would seem a thorny problem. If the business is being bought without debts does this mean the DLAs are to be written off? Or from the sales proceeds should the Directors first be repaid their loans, along with the other creditors, and then recieve whatever value is left in proportion to their shareholding?
How will the Revenue see this, Eric? As the money is being paid for the firm by the new owner buying the shares. Is there some tax efficient means by which the existing director/shareholders can offset their DLAs and other debts against the "profit" they will (hopefully) have made on the sale of their shares for Capital Gains Tax purposes?
Don said:
Eric Mc said:
From what Leftie said, it seems the company owes money to the directors. The sticking point is getting the two resigning directors to agree to the respective amounts they are owed. That is why I asked about the figures that had been shown in the accounts. After all, the directors agree and sign off the accounts, so, in theory, should have agreed the values of the loan accounts.
Indeed. This would seem a thorny problem. If the business is being bought without debts does this mean the DLAs are to be written off? Or from the sales proceeds should the Directors first be repaid their loans, along with the other creditors, and then recieve whatever value is left in proportion to their shareholding?
How will the Revenue see this, Eric? As the money is being paid for the firm by the new owner buying the shares. Is there some tax efficient means by which the existing director/shareholders can offset their DLAs and other debts against the "profit" they will (hopefully) have made on the sale of their shares for Capital Gains Tax purposes?
It souinds to me like the ex director is trying to get his bit ( £10,000) ahraed of the proceeds being split, as is my friend. I suspect her loan isn't in the books and will have been used to pay wages One does hope it was done throught the books!).
They are selling the company as I understand, but they are also seperating as a couple so they are both trying to point score and off-set loses in the relationship settlement with gains in the business settlement.
Leftie said:
Don said:
Eric Mc said:
From what Leftie said, it seems the company owes money to the directors. The sticking point is getting the two resigning directors to agree to the respective amounts they are owed. That is why I asked about the figures that had been shown in the accounts. After all, the directors agree and sign off the accounts, so, in theory, should have agreed the values of the loan accounts.
Indeed. This would seem a thorny problem. If the business is being bought without debts does this mean the DLAs are to be written off? Or from the sales proceeds should the Directors first be repaid their loans, along with the other creditors, and then recieve whatever value is left in proportion to their shareholding?
How will the Revenue see this, Eric? As the money is being paid for the firm by the new owner buying the shares. Is there some tax efficient means by which the existing director/shareholders can offset their DLAs and other debts against the "profit" they will (hopefully) have made on the sale of their shares for Capital Gains Tax purposes?
It souinds to me like the ex director is trying to get his bit ( £10,000) ahraed of the proceeds being split, as is my friend. I suspect her loan isn't in the books and will have been used to pay wages One does hope it was done throught the books!).
They are selling the company as I understand, but they are also seperating as a couple so they are both trying to point score and off-set loses in the relationship settlement with gains in the business settlement.
If the loans are in the books all is well. If they aren't - problem. Although - you'd have thought it would have shown up as "extra" cash in the bank that "shouldn't" be there...
Don said:
Leftie said:
Don said:
Eric Mc said:
From what Leftie said, it seems the company owes money to the directors. The sticking point is getting the two resigning directors to agree to the respective amounts they are owed. That is why I asked about the figures that had been shown in the accounts. After all, the directors agree and sign off the accounts, so, in theory, should have agreed the values of the loan accounts.
Indeed. This would seem a thorny problem. If the business is being bought without debts does this mean the DLAs are to be written off? Or from the sales proceeds should the Directors first be repaid their loans, along with the other creditors, and then recieve whatever value is left in proportion to their shareholding?
How will the Revenue see this, Eric? As the money is being paid for the firm by the new owner buying the shares. Is there some tax efficient means by which the existing director/shareholders can offset their DLAs and other debts against the "profit" they will (hopefully) have made on the sale of their shares for Capital Gains Tax purposes?
It souinds to me like the ex director is trying to get his bit ( £10,000) ahraed of the proceeds being split, as is my friend. I suspect her loan isn't in the books and will have been used to pay wages One does hope it was done throught the books!).
They are selling the company as I understand, but they are also seperating as a couple so they are both trying to point score and off-set loses in the relationship settlement with gains in the business settlement.
If the loans are in the books all is well. If they aren't - problem. Although - you'd have thought it would have shown up as "extra" cash in the bank that "shouldn't" be there...
Business is mainly cash, so I guess slipping a bit more in when turnover was falling, especially if it was going direct to staff and suppliers wouldn't immediately be obvious.
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