What are the procedures and tax implications for providing a company loan/mortgage to an external body of a private ltd co?

My client is a small brick cutting company, who are proposing to provide a loan to an external party.  The company has a turnover of around £120k per year and has a consistent bank balance in the region of around £300k.  The loan/mortgage proposal is also in the region of £300k to be repaid over the long term at a fixed rate of interest of 4.79% for the first 5 years?

Firstly, other than the obvious of being able to pay creditors and suppliers when they are due, what are the procedures and tax implications to the company if this goes ahead?

Many Thanks, Jacqui

 

 

Short description: 
Company to provide a mortgage/loan of a substantial amount to someone external to the company - procedures/tax implications?
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Comments

petersaxton's picture

Consumer credit licence

petersaxton |

Is it a limited company?

Otherwise I think you need a consumer credit licence.

Consumer credit licence

Jacq_Maud |

Hi, yes it is a limited company.

Various

JamesPrice |

On the basis that the borrower is a limited company which I think has been established above, is the borrower unconnected (i.e. any family relationships)?

Are there any external shareholders whose interests could potentially be harmed?

Is there security? At an interest rate of 4.79% I would assume that to be the case. How will the loan be secured?

I guess you're also running the risk of turning the company into more of an investment company than a trading company which could have ramifications for ER, BPR etc.

Have to say that from a distance this looks an odd thing to be doing.

Business Property Relief and Entrepreneurs Relief

Jacq_Maud |

Thank you for your comments.  Would you possibly be able to expand on your answer in respect of BPR and ER?  I am not famailiar with either.  I have confimed that the loan/mortgage proposal is for a long term friend  (no relation) who has put up half of the monies and requires a further £300k of which the one man ltd company would like to loan to him. 

The Director has sufficient cash funds to lend the money and could maybe set up another ltd company, loan the company the money and take the interest as salary?

Many Thanks

Jacqui

Business Property Relief and Entrepeneurs Relief

Jacq_Maud |

Thanks for the reply.  Would you be able to expand on the implications this sort of investment could have in respect of ER and BPR?

 

Many Thanks

Jacqui

petersaxton's picture

Limited company?

petersaxton |

I meant if the borrower was a limited company!

Set up another limited company? Loan the company the money? Take the interest as salary? What are you talking about? Why do that?

Sorry I misinterptretated

Jacq_Maud |

Sorry I misinterptretated your reply.  Trying to do everything quickly in the Summer hols, with kids and all!

The borrower isn't a Ltd co, but a friend of the one man Ltd co.  The Ltd co are proposing to loan this friend a long term loan.  I'm trying to establish how this would impact the Ltd company and not the person acquiring the loan.

You seem to be knowledgeable in this area and if I haven't burnt my bridges, I would really appreciate your thoughts, otherwise, thank you for your previous prompt and helpful replies.

 

Thank you

Jacqui

petersaxton's picture

I'm not very knowledgeable at all

petersaxton |

Read this

http://www.oft.gov.uk/OFTwork/credit-licensing/do-I-need/

"The Director has sufficient cash funds to lend the money and could maybe set up another ltd company, loan the company the money and take the interest as salary?"

I don't understand any of the above. I thought you said the company was lending the money but now you say that the director has the funds to lend the money.

Why would anybody lend somebody money but take a salary instead of interest?

I think you need to take legal advice.