Tax Implications of Loan Waivers

One common method of financing a start-up is lending money to the company. While this can provide flexibility in recovering funds without excessive administrative tasks or tax consequences, it can also lead to complications. Specifically, if a loan leaves the company insolvent or struggling to trade, waiving the loan may seem like a simple solution, but it can trigger additional tax liabilities. Understanding the tax implications is essential to avoiding or minimizing these potential consequences.

Corporation Tax on Loan Waivers

When a loan to your company is waived, it is considered income for the company. According to HMRC’s loan relationship rules, this income is subject to corporation tax (CT) at the prevailing rate (19% at the time of writing, increasing to 25% from April 1, 2023). Thus, waiving a loan can result in a tax cost for simply relinquishing your right to the funds owed by your company.

Avoiding Loan Relationship Charges in Insolvency

Certain exceptions to the loan relationship regime exist, such as waiving a debt when the indebted company is insolvent. However, strict conditions apply to these exceptions. One alternative to avoid the loan relationship charge is to exchange the loan for additional shares in the company. By doing so, the CT liability can be bypassed. However, if there are other shareholders, their consent will be required before acquiring more shares.

Inheritance Tax Implications of Loan Waivers

Waiving a loan can also impact inheritance tax (IHT) liabilities, particularly when multiple shareholders are involved. For example, if a company’s value increases due to the waiver, all shareholders benefit from the reduction in loan repayment obligations. In such cases, the IHT rules may classify the decrease in your estate’s value as a potentially exempt transfer (PET) to other shareholders. For example, if you waive a £30,000 loan and the company’s value increases by the same amount, with one other shareholder, your estate would decrease by £15,000, and their estate would increase by the same amount. This would be considered a £15,000 PET, which could affect IHT calculations if you pass away within seven years of the transfer.

Capital Gains Tax Loss Relief on Loan Waivers

Another tax consideration when waiving a loan is the potential eligibility for capital gains tax loss relief, provided specific conditions are met. This relief can help offset the tax consequences of waiving the loan, making it a valuable tool in tax planning.

Waiving a loan to your company can have various tax implications. By understanding these implications and considering alternative solutions, you can minimize potential tax liabilities while still supporting your company’s financial health.  If you need help to plan your taxes, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.