Directors Loan or Alphabet share?

[leaveitalone]

I'm starting a new property Ltd company and will be using the retained profits from my existing consultancy Ltd to fund the new company.
I'm getting conflicting advice from accountants and mortgage people about how to move the funds from one company to the other.

Options;
1. Directors loan. Nominal interest rate
2. Issue an alphabet share and give the new company a div.

The accountants I've talked to, including my existing Ltd one agree both are valid methods, but contradict each other about which one I should use.
The mortgage companies I talk to give anecdotal evidence saying that most contractors use a directors loan and many of the brokers are unaware of the alphabet share.

I'm looking for anyone with experience of either. Did you find personal pro's/con's - this could boil down to accountants with their own preference and I'd like to hear if either has worked out well (or badly) for anyone?

Note that I'm not interested in anything that hmrc would dislike. This is a genuine attempt to start a new business using profits from another which I'm led to believe is totally above board.

[NowPermOutsideUK]

I am aware of the Director loan approach but can you elaborate on what the alphabet approach is and whether dividend tax will have to be paid by the new ltd?

[northernladuk]

Why not use an intercompany loan? Exactly the same question as yours here but with intercompany loan.

https://forums.contractoruk.com/acco...-loan-spv.html

[Craig@Clarity]

Why not use an intercompany loan? Exactly the same question as yours here but with intercompany loan.

https://forums.contractoruk.com/acco...-loan-spv.html

^ This.

Forget director's loan. Consider either an inter company loan or dividends. Inter company loan would be your contracting co loaning money to your property co. which the property co. will need to repay at some point. You can choose to charge interest between the company's or simply interest free.

If you go down the dividend route, reclassify the share structure in your company and gift one of the alphabet shares to your property company. The dividend paid from one company to the other will be permanent i.e. not repayable to the contracting co.

[leaveitalone]

It seems that divs are the right route for me. As you say, any loan will need to be repaid. With a loan if you close the company that loaned the money without them being repaid the hmrc can view that as tax evasion. They would view the loans as never being intended to be repaid. My focus is to build a property portfolio so any profits from the property ltd would be ploughed into new properties and not available to repay loans.

Divs work well for me. No tax to be paid on the div because it's to another uk ltd company. Only snag there is that once you do this you can't claim BADR if you close the company. In my case one day I would close my consultancy ltd and focus on property which just means I have to div any residual profit from the consulting ltd and/or push it into pension - whatever gives the best return at the time.

The right answer is likely to be subjective of course - if the business you're giving money to will generate enough of a return to pay back a loan then that may be a good route and doesn't close off BADR. Doesn't work for me right now though.

Thanks for the input.

[Craig@Clarity]

It seems that divs are the right route for me. As you say, any loan will need to be repaid. With a loan if you close the company that loaned the money without them being repaid the hmrc can view that as tax evasion. They would view the loans as never being intended to be repaid. My focus is to build a property portfolio so any profits from the property ltd would be ploughed into new properties and not available to repay loans.

Divs work well for me. No tax to be paid on the div because it's to another uk ltd company. Only snag there is that once you do this you can't claim BADR if you close the company. In my case one day I would close my consultancy ltd and focus on property which just means I have to div any residual profit from the consulting ltd and/or push it into pension - whatever gives the best return at the time.

The right answer is likely to be subjective of course - if the business you're giving money to will generate enough of a return to pay back a loan then that may be a good route and doesn't close off BADR. Doesn't work for me right now though.

Thanks for the input.

Interesting. What's your view and understanding as to why BADR won't apply to your consultancy company if you go down the divs route?

[leaveitalone]

That's what my existing Ltd company accountant told me so I assuming they are correct. I don't have the accountancy detail on that I'm afraid.

[Maslins]

Interesting. What's your view and understanding as to why BADR won't apply to your consultancy company if you go down the divs route?

I don't think it would stop the consulting company qualifying for BADR in itself...but:
1) if the majority of the consulting company's profits are being transferred up to the property company via dividends, there won't be much retained earnings left in the consulting company to warrant MVLing/similar. The dividend permanently removes those profits from the balance sheet, whereas making a loan (director or interco) just means the type of asset changes from cash in the bank to a loan, still an asset, hence still retained profits.
2) if the property company is a shareholder, then surely it'd be justified in getting some of the proceeds of closure of the consulting company. BADR is purely a personal tax thing.

More generally our view would be avoid the alphabet share option. Yes they're widely used, and in most instances the taxpayer won't get into any trouble...but if HMRC were to enquire, we imagine the set up would be torn apart. Typically they're set up sloppily, formal rights of each share class not set properly, client just picks and chooses whatever they like whenever they like in terms of which shareholder gets what. If you ever did get taken to tribunal, good luck you/your accountant justifying that.

I'd also still question the logic of buying properties via a company in the first place. This has been debated multiple times on this forum in the last few years, pros and cons, but my view would still be that more often than not it makes sense to take the cash out of the company, suffer personal tax as appropriate, then buy the property personally.

[leaveitalone]

Buying personally won't fly at all. The amount of personal tax involved would half the number of houses I can buy. Also, the lending rates between personal and business are much closer than they used to be. They are not the same of course, but the difference is nowhere near the impact of the personal tax. Having talked to 3 brokers the lenders appear to prefer the div route too as its seen as a lower risk - that's just the feedback I've been given. A major one won't accept company loans as a source of deposits at all.

Doing it personally means that the cash coming from the property rents would also be taxed personally which again kills the growth for the property company. It's a huge and seemingly unrecoverable loss doing it personally.

I won't be using any profits from the property company until I'm giving up the consultancy side so it works quite well for me to leave the cash in there, build up more properties before using retained profits from the property company to pay down borrowing later on. At that point I'd be living off divs from that company rather than consulting.

The only interest in BADR was to save a small amount to reduce/pay off my own mortgage - ok there is a personal tax hit there, but it's a nice milestone to reach regardless. I know there is a limit above which you need a full audit etc, but I'd aim to be well below that with any excess going to the property ltd as I mentioned.

[northernladuk]

Buying personally won't fly at all. The amount of personal tax involved would half the number of houses I can buy. Also, the lending rates between personal and business are much closer than they used to be. They are not the same of course, but the difference is nowhere near the impact of the personal tax. Having talked to 3 brokers the lenders appear to prefer the div route too as its seen as a lower risk - that's just the feedback I've been given. A major one won't accept company loans as a source of deposits at all.

Doing it personally means that the cash coming from the property rents would also be taxed personally which again kills the growth for the property company. It's a huge and seemingly unrecoverable loss doing it personally.

I won't be using any profits from the property company until I'm giving up the consultancy side so it works quite well for me to leave the cash in there, build up more properties before using retained profits from the property company to pay down borrowing later on. At that point I'd be living off divs from that company rather than consulting.

The only interest in BADR was to save a small amount to reduce/pay off my own mortgage - ok there is a personal tax hit there, but it's a nice milestone to reach regardless. I know there is a limit above which you need a full audit etc, but I'd aim to be well below that with any excess going to the property ltd as I mentioned.

All those points maybe true but you haven't considered the taxs of offloading the profits and extracting the money out of the company at the end which will redress the balance somewhat. It's not as clear cut as what you've put.