I have a friend who perhaps foolishly lent money to a Ltd company. He borrowed this money from his father. Unfortunately this company went bankrupt together with this money.
The Ltd was a closed company and my friend should get tax relief on the interest element of this borrowing except that now he has no income and cannot pay.
If interest payments are deferred for a year or two can he obtain tax relief on this "back interest"? What must his relative say in his tax return?
Many thanks.
Having received no interest, the father has nothing to declare on his tax return until he actually does so.
Was the loan from the father documented and was it made explicit that the funds were being llent on to the close company?
If so, so long as the law does not change in the interim, relief will be due as and when interest is paid to the father.
`John Pointon Accountant, Tax Consultant "In business to grow your business"
Many thanks. I understand his father sent a cheque payable to the company and was cashed straight into the company's account. I assume the documentation such as bank details will be stored with the liquidators.
That merely proves that the money chaged hands, not that it was a loan.
So what sort of proof is needed?
My understanding is that all the directors, of which my friend was one, loaned the same amount. I assume there must be some documentation or verification.
A letter from the lender to the company setting out the terms of the loan as to principal, repayment and interest would be appropriate - ailing that, a statement from the directors confirming the terms upon which the monies were received by the company. Presumably, the monies were entered into the company's books as loans. How were they shown in the annual balance sheets?
John Pointon Accountant, Tax Consultant "In business to grow your business"
My understanding was that my friend received a loan from his father and he loaned the money to this company. For expediency the money went straight from father to company. The closing balance sheet by the liquidators shows my friend to be a creditor.
I doubt there was any paper work between friend and father. I suppose some can be rustled up retrospectively!
Clearly the liquidator was satisfied as to the source of the loan, Keep the closing statement of affairs and produce it to the Revenue should they ever raise the point. Never rustle up evidence retrospectively - you could go to jail and will certainly not receive £200!
John Pointon Accountant, Tax Consultant "In business to grow your business"
It's unlikely to be considered naughty to rustle up evidence retrospectively, provided all that is being done is to document after the fact what the intentions of all concerned were at the relevant time. Only if facts are falsified will they get into trouble.
What has happened here is that the father lent the son money which the son then lent to his company. Any repayments are clearly not taxable, and any interest paid by the company to the son will be taxed as the son's income only to the extent that it exceeds any interest the son pays to the father. In the case that the son charges the company the same rate as the father charges him, there is no charge to the son at all, but the father will be taxed on interest he receives, if any.
Indeed that was the ideal solution but the company became insolvent and the loan went with it. Hence the question about deferring interest payments because he can't afford to pay the interest at the moment. I assume these payments remain tax deductible and his father will pay tax on the interest he receives.
Your assumption is correct provided the law on the taxability of interest received and the deductibility of interest paid remains as it is currently .
John Pointon Accountant, Tax Consultant "In business to grow your business"
I would have thought so, on the basis that the original loan had a business purpose. Help sheet IR340 seems to concur, and IR150 page 23 directs you to claim the appropriate amount in box 15.1.
Quite.
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