Can my limited company lend money to another limited company?
Of course, it’s true that a limited company can lend money to another company, but there are quite a few things to consider.
And because business-to-business loans are such a huge topic, our advice on lending money from business to business will focus on the scenario where a single shareholder director owns two business companies in the UK, writes Eloïse Brown, Senior Tax Knowledge Officer at Moore Kingston Smith accounting firm.
First, the loan must be lawful from a corporate law perspective. Directors have a number of statutory duties, including the duty to act in the incorporation of the company, to exercise their powers wisely and to promote the success of the company. Concretely, this means that the articles of association of the company must allow the loan and that the lending company must have sufficient reserves.
Entrepreneurs should ideally seek legal advice to confirm these indications before making any firm decisions.
Pay attention to the rules of the participant
From a tax perspective, a managing contractor should take into account the rules for “participant loans” (often referred to as “455”). These rules most often apply when a company lends money to an individual shareholder or their partner and the loan remains unpaid.
If the rules apply, a 32.5% tax is levied on the outstanding loan amount nine months after the closing date. There is an extension to this rule that applies if a loan is made that is not covered by the main rule described above, and after the loan is made, a payment is made to a participant or associate. of a participant in the company by another person (i.e. the borrowing company).
Proximity, decision and exemption
This royalty would be not apply unless there is a strong link between loan and payment. For example, if the loan is made to finance the payment of a dividend to the shareholder or one of his associates by the borrowing company, and the payment is not subject to income tax in the hands of the beneficiary. So it would seem unlikely that this would apply, but it is something that should be considered depending on the circumstances.
The managing contractor should decide whether the loan should bear interest. Assuming that the transfer pricing rules (which impose arm’s length adjustments on transactions between related UK entities) do not apply due to the exemption for small and medium-sized enterprises, it is not necessary that the loan bears interest, although this may be preferable.
Debit / Credit
Provided it is expected that at some point in the future the loan will be repaid, this should be a “loan relationship”. This means that the lending company will be subject to corporation tax on interest receivable and the borrower will receive tax relief for interest payments. In the event of cancellation of the loan in the future, be aware that the companies being linked, the “debit” that would appear in the accounts of the lending company would not be tax deductible, while the “credit” of the borrower would not be tax deductible. be taxable. Depending on the circumstances, HMRC may consider that what actually happened in this scenario is a distribution to the shareholder, with no tax relief obtained and the shareholder subject to income tax on the amortized amount.
Final questions (taxes)
If the loan bears interest, you need to make sure that the interest rate is not excessive, as this can also lead to the amount considered excessive being treated as a distribution by HMRC.
In summary, lending from one business to another is possible and would avoid the double taxation that would apply if you first take money out of one business and then loan it to the other business yourself. The advice given here cannot cover all issues and you should, as always, seek legal and tax advice first.