Are there tax implications involved with inter-company loans?

Q: We are directors and sole shareholders for two closed companies. We would like one company to make a business loan to the other. Must we charge interest on the loan? Are there any tax implications for either company?

A: This is a complex area of tax law. You have to be careful that you do not get into the Loans to Participators legislation (Section 419 ITMA 1988) which requires additional corporation tax to be paid on loans to participators (directors/ shareholders) often in the form of overdrawn director’s loan accounts. The tax is repaid following repayment of the loan.

Consequently, if Company A makes a loan to Company B it would be wise to pay a “market rate” of interest i.e. consistent with what Company A would receive from a similar investment elsewhere. Considerations such as whether the loan was secured or not might affect the appropriate rate of interest.

In addition there will be alternatives to simply Company A making a loan to Company B (such as paying a dividend out of Company A to its shareholders who then invest in Company B).

For a fuller appraisal of the choices and the tax implications you should seek advice from a chartered accountant with specialist tax experience in closed companies.