Intercompany loan to fund startup

[IR35FanClub]

Right my war chest is sitting around earning nearly no interest.

My other half has skills that she's getting paid bugger all for at the moment and could be earning more than me based on what her current employer charges their clients.

So I've discussed using some of my spare cash to start her up in business. I'll be doing the IT and accounts set up for her and helping with marketing, but she'll be doing the leg work.

What I need to know is how do I go about creating a loan to the new company registered with solely her as a shareholder. I've had a look on the forums and there's lot of mentions of directors loans but this would be a commercial loan with interest paid back. Do I need an accountant and/or lawyer to draw up an agreement. I'm not happy about just handing out the money as I believe HMRC will want some evidence I haven't just gone and spent it on a nice holiday. Has anyone any experience of this and how much does it cost? I don't want to end up spending £500 to lend her £5k. Alternatively can it be done on a DIY basis using some standard template?

Things I'm thinking are having some clauses that stipulates when the loan needs to be repaid - I don't want monthly payments - something at the end of year 1 would be preferable - as she won't be earning a lot to start with. Also how to postpone payment if the business hasn't grown as fast as we like. It's these kind of issues that make me realise borrowing frmo me is more likely to lead to business success as she won't have stupid repayments meaning she makes a loss!

I want no income from her company, so won't have an interest in it as I already earn enough to hit the 40% limit from my own company. I believe from reading other threads this means I avoid the accusation that it's a directors loan, or a "pseudo" dividend. If she earns a lot and fancies paying me (as a contractor) for IT and accounting consultancy - then that's fine.

We are talking something in the regions of £5-10k, to fund stock purchases, equipment and consumables. Note - we are not married though do live together and she'll be working from home.

Any idea what happens if her business goes poof? Do I get to write off the loan against my profits? From reading other threads I can see I may have to pay HMRC upfront 25% of the CT that would have been due if I had not given it away, sorry lent it out.

If the business goes as well as I hope, then the loan will be repaid. I'll close down my contracting company and switch to working full time with her and take the retail side of it online. Or just stay at home and do the cooking ;-)

[dynamicsaxcontractor]

Right my war chest is sitting around earning nearly no interest.

My other half has skills that she's getting paid bugger all for at the moment and could be earning more than me based on what her current employer charges their clients.

So I've discussed using some of my spare cash to start her up in business. I'll be doing the IT and accounts set up for her and helping with marketing, but she'll be doing the leg work.

What I need to know is how do I go about creating a loan to the new company registered with solely her as a shareholder. I've had a look on the forums and there's lot of mentions of directors loans but this would be a commercial loan with interest paid back. Do I need an accountant and/or lawyer to draw up an agreement. I'm not happy about just handing out the money as I believe HMRC will want some evidence I haven't just gone and spent it on a nice holiday. Has anyone any experience of this and how much does it cost? I don't want to end up spending £500 to lend her £5k. Alternatively can it be done on a DIY basis using some standard template?

Things I'm thinking are having some clauses that stipulates when the loan needs to be repaid - I don't want monthly payments - something at the end of year 1 would be preferable - as she won't be earning a lot to start with. Also how to postpone payment if the business hasn't grown as fast as we like. It's these kind of issues that make me realise borrowing frmo me is more likely to lead to business success as she won't have stupid repayments meaning she makes a loss!

I want no income from her company, so won't have an interest in it as I already earn enough to hit the 40% limit from my own company. I believe from reading other threads this means I avoid the accusation that it's a directors loan, or a "pseudo" dividend. If she earns a lot and fancies paying me (as a contractor) for IT and accounting consultancy - then that's fine.

We are talking something in the regions of £5-10k, to fund stock purchases, equipment and consumables. Note - we are not married though do live together and she'll be working from home.

Any idea what happens if her business goes poof? Do I get to write off the loan against my profits? From reading other threads I can see I may have to pay HMRC upfront 25% of the CT that would have been due if I had not given it away, sorry lent it out.

If the business goes as well as I hope, then the loan will be repaid. I'll close down my contracting company and switch to working full time with her and take the retail side of it online. Or just stay at home and do the cooking ;-)

For 5 grand, why do you not just take it out of your company as a directors loan/dividend/salary or whatever and lend it to her so she can put it in the company herself?

[stek]

For 5 grand, why do you not just take it out of your company as a directors loan/dividend/salary or whatever and lend it to her so she can put it in the company herself?

Because there will be tax to pay?

[tractor]

...

Because there will be tax to pay?

Up to 5k as long as it's paid back before 9 months after the company year end in which it is loaned there is none. If this is a one off, it should be possible. No doubt one of the friendly accountants will be along soon to chastise me or confirm it

[Nixon Williams]

From the company's position:

Any loan that is outstanding at the company’s yearend is subject to a corporation tax surcharge under section 455 of the Corporation Tax Act 2010 (section 455 CTA2010). The surcharge value is calculated as 25% of the outstanding loan at the yearend and is payable with the corporation tax at the normal due date.

However, if part or all of the loan is repaid within 9 months of the yearend then the surcharge charged is reduced by 25% of the repaid amount and as such, if the whole loan is repaid within 9 months of the yearend, there will be no surcharge applied.

The surcharge is repayable by HMRC but only at a point when the director’s loan has been cleared. In this case, any monies paid under the surcharge will be repaid to the company 9 months after the end of the accounting period in which the loan is repaid.

From the personal position:

Any loan that exceeds £5,000 at any point during the year (even if just by a penny) must be declared on the P11d each tax year in which the loan is outstanding.

The benefit in kind arises if the loan is a ‘beneficial loan’ i.e. the interest charged on the loan is below the official interest rate as set by HMRC (currently 4.0% for 2012/13). The benefit in kind value is equivalent to the official rate of interest on the loan less any interest paid by the employee (or director) to the company during the year.

The tax payable by the recipient of the loan will be at their marginal rate i.e. 20/40/50% on the benefit in kind value once calculated on the P11d and the company will also pay class 1a national insurance on this value.

If the loan is over £10,000 the company should seek shareholder approval first, just ensure that you get the paperwork right.

Alan

[d000hg]

On a bit of a tangent, can your company simply buy a share in her company?

[Maslins]

Up to 5k as long as it's paid back before 9 months after the company year end in which it is loaned there is none. If this is a one off, it should be possible. No doubt one of the friendly accountants will be along soon to chastise me or confirm it

Yeah I think this is valid...though you're following the more recent poster suggestions about doing director loan, rather than directly from Co 1 to Co 2 which the OP was suggesting.

I'd also recommend the director route if you were a client of ours, mainly for simplicity and clarity.

If Co 1 lends to Co 2, firstly you've got the hassle of both companies needing to report related party transactions for loan balance, interest paid etc. Then you've possibly got issues surrounding the fact the companies have similar beneficial owners (not 100% sure on this). The numbers involved are relatively small, so I wouldn't be too concerned about it.

One thing I'd strongly recommend (which I hope you'll say "of course", but I've often seen this not done in practice) is that if you do need to transfer funds from one business to the other, you do it in occasional large chunky loans (either via director or not). You'll end up with a massive bookkeeping headache if Co 2 buys something but Co 1 physically pays for it (as it has the cash at the time).