These rules are covered under Corporation Tax Act (CTA) 2010: Section 455 to 465
Section 455 will apply to loans to directors who are also shareholder (owning 5% or more) and to shareholders who are not directors. It does not apply to directors who are not shareholders.
|When was the loan repaid
|Within 9 months of Year end (YE)
|After 9 months of YE
||Tax @ 32.5% (previously use to be 25%)
Relief given in the YE when loan re-paid. Relief should be claimed within 4 years.
Tax avoidance measures:
Section 464C introduced w.e.f. 20 March 2013. Basically any window dressing is set aside. For more information see CTM61615.
Repaying loan via dividends/salary/bonus is not window dressing.
Points to be aware:
1) No non-business expenses posted as business expense.
2) All employment income has appropriate tax and NIC deducted.
3) If DLA balance anytime during the year over £10k. It will be treated as beneficial loan and showed by reported in P11D and NIC Class 1A paid.
Please note this limit does not apply to Sec 455 charge.
To avoid this , one can issue interim dividends to ensure loan balance does not go over £10k anytime during the year.
How are funds distributed among creditors in a restaurant insolvency ?
From 6 April 2020 HMRC will become preferential Creditor in UK insolvencies.
UK treasury has written an easy to read paper on this matter. Explaining the effects of this change and showing hierarchy of distribution of funds in insolvency.
It shows that unsecured creditors like suppliers usually recover 4% of their dues.
I think it’s a good move by the government to secure taxes for the public good.
Restaurant suppliers should make note and negotiate better credit terms.
A summary of key changes.
- Minimum wage: From April 2019 the National Living Wage will increase from £7.83 an hour to £8.21. An increase of 38 pence, an above inflating increase of 5%.
- Personal Allowance will rise from 11,850 to £12,500 from April 2019 and will remain the same in 2020.
- Higher Rate Threshold will increase from £46,350 to £50,000 in April 2019
- Duty on beer, cider and spirits remains frozen.
- Annual Investment Allowance will increase from £200k to £1 million from 1 January 2019 and will remain at this level till 31 December 2020.
- New Capital allowance (Structure and building allowance): Relief will be provided on eligible original construction costs incurred on or after 29 October 2018, at an annual rate of two percent (flat rate) on a straight-line basis off their profits before they pay tax.
- Business rates: Business rates will be cut by a third for two years for shops, pubs, restaurants and cafes in England with a rateable value of £51,000 and under.
Other interesting points:
- 2% digital services tax on large digital firms
From April 2020, large social media platforms, search engines and online marketplaces will pay a 2% tax on the revenues they earn which are linked to UK users.
- Non-resident landlord companies
From 6 April 2020, non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged to Corporation Tax, rather than being charged to Income Tax as at present.
- Annual Capital Gains allowance increases to £12,000 for individuals.
Should I transfer my existing properties in a new company ?
Three taxes are considered when considering the question of incorporating a letting business:
- Corporation/Income Tax
- Capital Gains Tax ; and
- Stamp Duty Land Tax (SDLT).
1. Corporation/Income Tax
- Corporation tax rates are lower than income tax rates
- Continued tax relief on mortgage interest
- Flexibility in timing of profit extraction.
2. Capital gains tax (CGT)
Transfers between connected parties are deemed at market value (MV) but there is `incorporation relief ` available.
No CGT payable if transfer is for shares in the business.
Please note annual exemption allowance, currently £11,700 not available to companies
3. SDLT – no relief available.
SDLT payable on MV, irrespective of consideration actually paid.
Future purchase – In case buyer is a company it pays 3% surcharge (threshold £40k) in all cases, whether or not company owns another property or not. Thus landlords cannot avoid the 3% surcharge by buying properties via company.
- Refinance costs
- Increase in interest rates – as bank usually charge more to limited company landlords.
- Huge SDLT bill on transfer of assets.
- Other fees – Lawyer, accountant, valuer etc.
Lastly, there is no guarantee HMRC will not change the rules for finance costs relief for companies in the future.
I think the sensible approach will be to leave the existing portfolio as it is but to buy new properties in a limited company if the aim is to expand the portfolio rather than profit extraction from the business. This will require another article in greater detail.
PS – There maybe inheritance tax implications as well which are not considered above.
Can a child hold shares in a company
There is no statutory provision prohibiting a child from owning shares.
Please note contracts cannot be forced against minor thus it’s advisable that that shares are fully paid up.
Dividend income is deemed under ITTOIA/S629 to be that of the parent for tax purposes, and is not treated as the child’s. So there is no tax advantage in holding shares in a child’s name.
I read a good article which gives alternatives to registering child as a shareholder. Click here.
If the client still wants to allot share to a child. Then a bare trust is needed. There is no legal requirement to create a formal document to create a bare trust.
Name in the register of members can be simply – Mr Parent as bare trustee of Mr Child.