intercompany loan repayment

[mgrover]

I am trying to understand something about intercompany loans.

Lets assume a corp tax rate of 20% for ease and ignoring all the thresholds for now(I've also seen the associated company rule but for now just for simplicity lets assume 20%).

Company A lends Company B 100,000 for lets say 10 years with possible interest.

Company B makes £10,000 in the first year.

Will Company B have to pay Company A first or will corp tax be deducted, in this case 2k, then 8k is repayment?

Supposedly the loan is corp tax neutral because it's money thats already been corp taxed so I'd assume the full £10k would be available for repayment.

If I knew for certain I wouldn't be asking.

Cheers

[northernladuk]

Question : Is this a tax wheeze or is it a genuine loan for a business reason?

1. Company B's Earnings and Tax Liability

• Company B earns £10,000 in the first year.
• Corporate tax is typically applied to profits, which in this case, would be £10,000 (assuming no other expenses or deductions).
• The corporate tax rate is 20%, so Company B's tax liability would be 20% of £10,000, which is £2,000.

2. Taxable Profit and Loan Repayment

• After paying the £2,000 in corporate tax, Company B would have £8,000 left in net profit.
• However, the loan repayment to Company A is not directly affected by the corporate tax (because it is a financial transaction between two companies). The loan repayment itself doesn't count as an expense that would reduce taxable profit.
• Thus, Company B would repay the full £10,000 (the loan principal) to Company A, regardless of the corporate tax.

3. Summary of the Financial Flow

• Company B's Profit: £10,000 (before tax)
• Corporate Tax Paid: £2,000 (20% of £10,000)
• Net Profit (after tax): £8,000
• Loan Repayment to Company A: £10,000 (the full amount, as it isn't a tax-deductible expense)

So, to answer your question directly: Company B would have to pay the full £10,000 repayment to Company A. The £2,000 corporate tax liability doesn't impact the loan repayment amount.

But you've negated interest in your calcs which I am pretty sure you'll need so haven't got the full picture. I'd be asking an accounant for a full breakdown. Be honest why you are doing it as it may affect their advice.

[mgrover]

Money sat around doing nothing so buying a BTL.

Currently trying to decide between taking a mortgage or not.

Am kinda confused on the financial flow

Wouldn't company B only have 8k to pay company A, or I guess it goes into arrears.

The lack of interest is just for ease of understanding the numbers on my end.

[northernladuk]

I'd have a good sit down with an accountant/tax advisor then. When this is asked on here, and it has been asked a lot, the advice is nearly always to buy it personally. I think you need to understand the full picture, cost to buy, on going costs and cost to offload. It's far from straightforward and I forget the detail but it's advice has always been to buy personally.

[mgrover]

I'd have a good sit down with an accountant/tax advisor then. When this is asked on here, and it has been asked a lot, the advice is nearly always to buy it personally. I think you need to understand the full picture, cost to buy, on going costs and cost to offload. It's far from straightforward and I forget the detail but it's advice has always been to buy personally.

fair enough, appreciate the help. the corp tax question alone kinda makes ya wonder if its worth it in grand scheme.

cheers

[WTFH]

August 2023: https://forums.contractoruk.com/gene...ity-check.html
June 2024: https://forums.contractoruk.com/acco...-mortgage.html

So, are you actually buying a house, or is this the third house in 18 months (and we could go back to look at your ideas for buying a classic car and doing it up through your company, buying a motorbike through the company, etc)

[mgrover]

August 2023: https://forums.contractoruk.com/gene...ity-check.html
June 2024: https://forums.contractoruk.com/acco...-mortgage.html

So, are you actually buying a house, or is this the third house in 18 months (and we could go back to look at your ideas for buying a classic car and doing it up through your company, buying a motorbike through the company, etc)

i wish it was the third house in 18 months.

then my BTL empire would be on its way.

this will be my first, and hopefully not last. but the plan was do 1 house for 2 years to get a feel for it.

if it goes tits up, sell it and repay the loan with the money generated.

you still wont be happy with the new harebrained idea but what ya gonan do

[WTFH]

if it goes tits up, sell it and repay the loan with the money generated.

you still wont be happy with the new harebrained idea but what ya gonan do

If you follow the wisdom of some on here, the housing market bubble is about to burst and interest rates are going to go through the roof.

If that's the case, it's probably a good idea to pay down any debt you have (i.e. your personal mortgage) and if you're going to BTL, make sure that you are either paying the mortgage down (not just paying interest), or that you have enough spare cash to blow if you have to sell the property for less than you bought it for.

It doesn't matter whether I am happy or not - I am not reliant on your income, like may be, neither have a loaned you money, like a bank manager may have.
It's not a case of me being happy, in fact I'm laughing at some of the ideas.

[mgrover]

If you follow the wisdom of some on here, the housing market bubble is about to burst and interest rates are going to go through the roof.

If that's the case, it's probably a good idea to pay down any debt you have (i.e. your personal mortgage) and if you're going to BTL, make sure that you are either paying the mortgage down (not just paying interest), or that you have enough spare cash to blow if you have to sell the property for less than you bought it for.

It doesn't matter whether I am happy or not - I am not reliant on your income, like may be, neither have a loaned you money, like a bank manager may have.
It's not a case of me being happy, in fact I'm laughing at some of the ideas.

all sound like sensible ideas.

i just think whoevers left after enough have sold up will be able to charge what they fancy really.

am defo going to pay the tulip out the house itself rather than just the interest

thats one thing am umming and ahhing about.

i can pay for the entire thing and owe nobody thing. but ofc that leaves the lending LTD co with less and a bigger loan to repay that I can't see the new company doing given the time frame of 35 years.

now if the tax situation, ie if the repayment to the LTD co was corp tax deductible then it might have been different.

the current scheme isn't anything too crazy. i am buying my own property via a SPV I own, i am also purchasing a new house to move into because thats the house we've managed to snag

the deposit for the new property will come from equity that will be released in the form of the sale of my existing property to the SPV with a mortgage all agreed on all fronts.

[pjt]

Money sat around doing nothing so buying a BTL.

Currently trying to decide between taking a mortgage or not.

Am kinda confused on the financial flow

Wouldn't company B only have 8k to pay company A, or I guess it goes into arrears.

The lack of interest is just for ease of understanding the numbers on my end.

I've done similar setting up a seperate SPV and using it to by multiple BTL properties. I had a large sum in my LTD and basically handed it over to the new SPV as an interest free loan which allowed me to get the ball rolling on buy BTL's (bought them off myself personally). Many benefits one being the release of a massive amount of equity I had personally in my personal BTL portfolio and in effect get at the cash sitting in my LTD without any divi tax hit. Moving to an SPV also has some advantages espeically if your looking to get mortgages as interest is still tax deductable.

I hear a lot about the impact of government meddling in BTL and it is a pain and making things difficult but at the same time the actual supply of rentals in my area has dropped as a lot have left the market leaving the rest to clean up. Rents are up about significantly over the past few years so more hassle has resulted in more profit