Dealing with DLAs

Large directors’ loan accounts are a common feature of a lot of businesses that we deal with. They aren’t ideal, but very often they are just part of the landscape and need to be dealt with. No one likes having recoverable s.455 tax which sits there for years.

Often when we come across these problems, the business owner / director will personally own assets which are used in the business and that gives an opportunity to transfer the asset to the company in satisfaction of the debt. This can trigger capital gains tax liabilities, so if we’re looking at a significant amount we’ll often tie this planning in with suggesting the business owner considers taking a large bonus that year and makes an EIS qualifying investment. Being able to claim both income tax relief and deferral of the capital gain on the back of an EIS investment can make this type of solution much more attractive, particularly as the EIS investment will be IHT free after 2 years and so offers a way of passing wealth to other family members in a tax efficient way.

An example of this which we handled recently was with a business in Liverpool which was held in the name of one of the shareholders who had a large DLA. The property was moved into the company to repay the DLA and then contributed to a business pension, to reduce the risks involved with having the asset in the trading vehicle (which was why it was in personal ownership at the outset). This meant that the rent the company was paying was received tax free in the pension rather than suffering 40% income tax in the hands of the owner.

A parcel of land attached to the building was separated out and left in the owner’s name. That parcel has potential development value and, although the pension could be used to shelter the potential uplift in value (provided it is moved out of the pension before becoming residential property), leaving it in personal ownership met the owner’s aims of protecting that value for himself, with easier access to the proceeds than those in the pension.

The transaction costs included legal fees, SDLT, pension set up fees, consultancy and capital gains tax. They were significantly outweighed by the s.455 recovery (not to mention the corporation tax savings and income tax savings).