Writing off a loan between your own companies: who gets relief, who is taxed, and why often neither
An owner with two companies lends from the one with cash to the one without, and eventually the money is not coming back. Writing the loan off feels like an accounting tidy-up. For corporation tax it is governed by specific rules, and the answer depends on who lent, who borrowed and whether they were connected at any time in the period. Here are three common cases, worked through, and a trap for anyone buying a connected company's debt at a discount.
The rule in one sentence
Where two companies are connected, the release of a loan between them is ordinarily neutral: the lending company gets no deduction for the amount it gives up, and the borrowing company is not taxed on the amount it no longer owes. Those are sections 354 and 358 of the Corporation Tax Act 2009, within the loan relationship rules that govern how companies are taxed on debt. HMRC's Corporate Finance Manual gives the purpose plainly: to stop connected companies obtaining relief more than once for the same economic loss, and to stop them obtaining relief for funding a company through debt rather than by subscribing for shares. Connected companies must also use the amortised cost basis for loans between them, rather than fair value.
What connected means here
Section 466 of the 2009 Act makes two companies connected for an accounting period if there is a time in the period when one controls the other, or both are controlled by the same person. Control, under section 472, is the power of a person to secure that the company's affairs are conducted in accordance with that person's wishes, through shareholdings or voting power, or through powers in the articles or another governing document. The person can be an individual, so two companies owned outright by the same director are connected. HMRC's guidance at CFM35120 accepts that person can mean persons, but several people count together only if together they can in fact secure control, which is a question of fact; an agreement to vote together is evidence of it. Note the timing rule in section 348(6). If the relationship is connected at any time in the accounting period, it is treated as connected for the whole period, so selling one of the companies does not free a release made later in the same period.
Case one: sister companies with one owner
The figures in all three cases are illustrative, not anyone's affairs. A director owns all the shares in a letting company and in a development company. The letting company lends the development company GBP 200,000 for a project that fails, and the loan is released. The two companies are controlled by the same person, so they are connected. The letting company gets no deduction for the GBP 200,000. Had the borrower been an unconnected company, the release would have produced a loan relationship debit worth GBP 50,000 at the 25 per cent main rate. The development company, for its part, has no taxable credit. Nobody is relieved and nobody is taxed. If the owner expected the loss to shelter the letting profits, it will not.
Case two: the owner lends personally, then waives
Change one fact. The director lends the GBP 200,000 personally and later waives it. There is now no connected companies relationship, because the lender is an individual, and section 358 does not apply. HMRC's manual states that amounts credited in the debtor's accounts on a release will normally be taxable as loan relationship credits, and section 321 brings into account credits recognised directly in equity, so recording the waiver as a capital contribution does not of itself take it out of charge. Unless an exemption applies, the company has a taxable credit of GBP 200,000, though losses of the same period may absorb it. The director fares no better. Relief for a loan to a trader under section 253 of the Taxation of Chargeable Gains Act 1992 is denied where the amount has become irrecoverable because of an act of the lender, and a voluntary waiver is exactly that. The cleaner course is often to capitalise the debt instead. Section 322(4) of the 2009 Act exempts the debtor's credit where the debt is released in consideration of ordinary shares, which for this purpose excludes fixed rate preference shares.
Case three: the company lends to its owner, then writes it off
Reverse the direction. A close company lends GBP 30,000 to its director-shareholder and later writes the loan off. Section 321A denies the company any deduction for the release where the loan gave rise to the section 455 charge. The director is taxed on the amount released as if it were a dividend, under section 415 of the Income Tax (Trading and Other Income) Act 2005, at the 2026/27 dividend rates of 10.75, 35.75 and 39.35 per cent, and any section 455 tax the company has paid is repaid under section 458, subject to its timing rules. HMRC's further view, at CTM61660, is that where the director is an employee the amount released is earnings for Class 1 National Insurance, a view the First-tier Tribunal upheld in Stewart Fraser Ltd v HMRC [2011] UKFTT 46 (TC). A written-off director's loan is therefore taxed on the director, carries National Insurance, and gives the company nothing.
The trap: buying a connected company's debt at a discount
Suppose a company you control is struggling and its bank will sell the loan for less than its face value to another of your companies. Section 361 of the 2009 Act treats the debtor as releasing the difference where a company acquires impaired debt from an unconnected party for less than its carrying value and is connected with the debtor immediately afterwards. The debtor is taxed on a deemed release equal to the amount by which the price paid falls short of the carrying value of the loan in its accounts. There are exceptions, set out in HMRC's guidance from CFM35530 onwards, for corporate rescues and for certain debt-for-debt and equity-for-debt exchanges, but they have conditions, and they should be established before the purchase rather than argued afterwards. Buying the bank's loan at 60 pence in the pound looks like a bargain for the group and can produce a taxable credit of the other 40 pence in the company least able to pay it.
Two points outside tax
First, company law. A release that moves value from a company to its shareholder, or to another company that shareholder owns, can amount to a distribution in company law terms, which a company may make only out of distributable profits and with proper authority. Take company law advice before signing. Second, the paperwork. A release given for nothing in return is normally made by deed, and it should be dated and reflected in both companies' accounts for the same period, so that the treatment on each side can be seen to match.
Before any release is signed
Ask four questions. Are the two companies connected at any time in the accounting period, applying the control test in section 472? If the lender is an individual, would converting the loan into ordinary shares serve better than waiving it? If the borrower is a shareholder, has the company priced in the dividend tax, the National Insurance and the lost deduction? And if anyone in the group is about to buy debt owed by a connected company, has section 361 been tested before the price is agreed? A release is a single signature. Its tax consequences run through the whole accounting period on both sides.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.