repayments of loans for abusiness

nino1

i am thinking of taking out a personal loan of 150,000 over 5 yuears to buy a business making a net profit of 50,000 yearly. the business needs cash flow of 5000 from the net profit leaving 45,000. My loan repayments will be 34000 yearly.
in order to use this balance of the net profit to make repayments for the loan i assume the 45,ooo would be due to regular income tax, taxed at the higher rate in my situation and result in only around 22000 available for the repayments.

is there a more tax efficient way of doing this where the net profit can be used the make the repayments in full.

is itpossible to get a business loan where the profits of the business are used to make the repayments without being subject to income tax?

smcgiff

Do you have any other income other than the profits of the business? Why is the bank giving you a loan of €150k - will it be based on the profits of the business you are buying?

I don't understand where you are getting the €45k figure from. Are you saying €5k needs to be reinvested into the business each year?

You're right tax will be on the net profit. I doubt you would pay so much tax unless you have other income (if you have other income your whole scenario needs adjusting)

You can claim tax relief on the interest incurred on the amount to buy the shares of a company you work in, but you're not doing that. Maybe someone else knows if there is another relief to help you.

However, the problem here seems to be the desire to pay back €150k in five years. Why so soon? Could you not spread it out over 10 years?

nino1

smcgiff wrote: »

Do you have any other income other than the profits of the business? Why is the bank giving you a loan of €150k - will it be based on the profits of the business you are buying?

I don't understand where you are getting the €45k figure from. Are you saying €5k needs to be reinvested into the business each year?

You're right tax will be on the net profit. I doubt you would pay so much tax unless you have other income (if you have other income your whole scenario needs adjusting)

You can claim tax relief on the interest incurred on the amount to buy the shares of a company you work in, but you're not doing that. Maybe someone else knows if there is another relief to help you.

However, the problem here seems to be the desire to pay back €150k in five years. Why so soon? Could you not spread it out over 10 years?

thanks smcgiff,
I earn 70,000/annum as an extra income.
yes, i estimate 5,ooo of the net profit will be required for cash flow hence leaving 45,000 from the net profit.
I assume the only way to use the company to pay back the loan is to draw on the net profit which will be taxed at the higher rate. Is there a more tax efficient way?

smcgiff

Tax is not my strong point and you may have better luck in the taxation forum. As it stands you could be paying over 50% tax on your 50 k profit.

smeharg

There possibly is a more tax efficient way, for example, transferring the business to a limited company. But there's a lot involved in this and you really need to get (ie pay for!) proper advice.

nino1

smeharg wrote: »

There possibly is a more tax efficient way, for example, transferring the business to a limited company. But there's a lot involved in this and you really need to get (ie pay for!) proper advice.

the business already is a limited company, does that make a difference?

who is the best person to seek advise from, an accountant or a financial advisor or a tax advisor?

barneystinson

nino1 wrote: »

the business already is a limited company, does that make a difference?

who is the best person to seek advise from, an accountant or a financial advisor or a tax advisor?

A registered tax consultant would be your best bet, or an accountant who is also AITI qualified.

But either way, you won't get relief for the capital repayments on the loan, so you may forget about that straight away.

There used to be a tax relief for interest paid by individuals on loans applied for the purpose of acquiring the shares in a trading company (the relief was under Section 248 TCA 1997), but this relief is not available on new loans taken out after 7 December 2010.

So in other words, I'm pretty sure the answer is No there's no tax relief available for what you want to do, but as I'm not being paid I don't intend to research it fully!

One possibility that springs to mind, that doesn't involve tax relief per se (simply a more tax efficient structure), is that you could form your own Ltd Co, have the company take out the loan and acquire the shares in the trading company, or else you take out the loan and then loan the money to the company to buy the shares. By doing it this way the loan will be repaid out of monies that have been subject to Corporation tax, rather than Income Tax. Go get proper professional advice, because there are many ways to skin a cat, and good advice will more than pay for itself here.

henryd65

Since you have other taxable income, have you thought about making an investment of 150k in the company under the Employment and Investment Incentive Scheme – the new BES.

Would this work for you ?

smeharg

henryd65 wrote: »

Since you have other taxable income, have you thought about making an investment of 150k in the company under the Employment and Investment Incentive Scheme – the new BES.

Would this work for you ?

Based on the information provided by OP, EIIS is unlikely to be available.

Cilldara11

nino1 wrote: »

thanks smcgiff,
I earn 70,000/annum as an extra income.
yes, i estimate 5,ooo of the net profit will be required for cash flow hence leaving 45,000 from the net profit.
I assume the only way to use the company to pay back the loan is to draw on the net profit which will be taxed at the higher rate. Is there a more tax efficient way?

Nino,

There's such a thing as a director's loan. Where you lend the company money in your personal name. E.g. Let's say you give your company 50k over 3 yrs and this appears as a liability under creditors falling due in more than one year on the companies balance sheet. Your company repays the loan to you over time. This is a good alternative to drawing money from the capital a/c which is taxed. I'm not an expert on it, but I know a number of directors who do this. A good accountant can advise you on setting this up.

dbran

Hi

Make sure you don't breach Section 60 CA 1963 which prohibits the giving of assistance by a company for the purchase of its own shares.

Regards

dbran

nino1

Cilldara11 wrote: »

Nino,

There's such a thing as a director's loan. Where you lend the company money in your personal name. E.g. Let's say you give your company 50k over 3 yrs and this appears as a liability under creditors falling due in more than one year on the companies balance sheet. Your company repays the loan to you over time. This is a good alternative to drawing money from the capital a/c which is taxed. I'm not an expert on it, but I know a number of directors who do this. A good accountant can advise you on setting this up.

Thanks Cilldara, this is interesting but i'm not sure I understand how this works.
If i take out a personal loan to buy the business and give the business a directors loan and pay the repayments from the business is that not the same as just paying from my own pocket?
sorry if i sound a bit dumb!

barneystinson

nino1 wrote: »

Thanks Cilldara, this is interesting but i'm not sure I understand how this works.
If i take out a personal loan to buy the business and give the business a directors loan and pay the repayments from the business is that not the same as just paying from my own pocket?
sorry if i sound a bit dumb!

Have you read my previous post?! Anyway I'll try again:

Someone currently owns the shares in a company. You want to own those shares - so it is your "target" company. This essentially gives you 2 options -1. You can buy them directly yourself, or
2. Form your own Ltd company and have that company buy the shares in the other company (i.e. you'll own a company which owns the target company).

If you go for option 1 you have to get a personal loan, and the repayments by you of this loan aren't eligible for any tax relief - they would have to be financed out of your personal after-tax income.

If you go for option 2, you still borrow the money personally, and you then give your own newly formed company a loan of the money and it purchases the shares in your target company. Now, you have a loan of 150k which you have to pay back to the bank, and your company has a loan of 150k, which it owes back to you. So your repayments on your loan to the bank can be covered by the company repaying you the 150k it owes you. There is no tax / legal issue with a director being repaid money advanced by them to the company (as long as they aren't being repaid at the expense of other creditors).

dbran

barneystinson wrote: »

Have you read my previous post?! Anyway I'll try again:

Someone currently owns the shares in a company. You want to own those shares - so it is your "target" company. This essentially gives you 2 options -1. You can buy them directly yourself, or
2. Form your own Ltd company and have that company buy the shares in the other company (i.e. you'll own a company which owns the target company).

If you go for option 1 you have to get a personal loan, and the repayments by you of this loan aren't eligible for any tax relief - they would have to be financed out of your personal after-tax income.

If you go for option 2, you still borrow the money personally, and you then give your own newly formed company a loan of the money and it purchases the shares in your target company. Now, you have a loan of 150k which you have to pay back to the bank, and your company has a loan of 150k, which it owes back to you. So your repayments on your loan to the bank can be covered by the company repaying you the 150k it owes you. There is no tax / legal issue with a director being repaid money advanced by them to the company (as long as they aren't being repaid at the expense of other creditors).

Hi Barneystinson

I'm sorry if I am missing something but I dont think this would work(sorry ) The only difference between 1) and 2) is that in 2) you create a group. I know you tax guys like to create group I dont really see the point as it would seem to achieve the same result in the end.

Your new company is just a shell and has no assets other then the shares it bought in the target company. It therefore cannot pay you back the money unless it gets the money from the target company to pay to you.

In my opinion this would breach section 60 CA 1963 as the target company is indirectly giving assistance for the purpose of purchasing its own shares. http://www.irishstatutebook.ie/1963/en/act/pub/0033/sec0060.html#sec60

There are ways around this section of Company Law but they are not recommended as they are extremely onerous as it effectively requires the directors of the company to sign a statutory declaration to the effect that the company will always be able to pay it debts as they fall due. Because this declaration is effectively open ended I would never allow anyone to sign it.

Also as this creates a group situation an audit is required and as section 60 is an indictable offense, if it is not fully complied with, a report by the auditor would have to go to the ODCE.

Basically I dont think this can be done legally under company law other then via a salary as otherwise you are effectively reducing the assets of the company that are available to creditors.

Again sorry if I have missed something along the way.

Regards

dbran

smeharg

dbran wrote: »

Hi Barneystinson

I'm sorry if I am missing something but I dont think this would work(sorry ) The only difference between 1) and 2) is that in 2) you create a group. I know you tax guys like to create group I dont really see the point as it would seem to achieve the same result in the end.

Your new company is just a shell and has no assets other then the shares it bought in the target company. It therefore cannot pay you back the money unless it gets the money from the target company to pay to you.

In my opinion this would breach section 60 CA 1963 as the target company is indirectly giving assistance for the purpose of purchasing its own shares. http://www.irishstatutebook.ie/1963/en/act/pub/0033/sec0060.html#sec60

There are ways around this section of Company Law but they are not recommended as they are extremely onerous as it effectively requires the directors of the company to sign a statutory declaration to the effect that the company will always be able to pay it debts as they fall due. Because this declaration is effectively open ended I would never allow anyone to sign it.

Also as this creates a group situation an audit is required and as section 60 is an indictable offense, if it is not fully complied with, a report by the auditor would have to go to the ODCE.

Basically I dont think this can be done legally under company law other then via a salary as otherwise you are effectively reducing the assets of the company that are available to creditors.

Again sorry if I have missed something along the way.

Regards

dbran

I think you're taking a too literal intrepretation of S60.

The repayment of the loan is out of aftertax profits of the company, ie profits available for distribution. Once those profits are distributed to the shareholders the shareholders can apply them to whatever purpose they so wish.

S60(12) states:

Nothing in this section shall be taken to prohibit -(a)the payment by a company of a dividend or making by it of any distribution out of profits of the company available for distribution;

If there are no profits there is no liability on the company. S60 acts to prevent the situation where the company is liable for repayment of loan. That is not what is being suggested here.

If your interpreation of S60 is correct then the relief previously available tax for interest on a loan taken out for investment in a company would have been contrary to company law.

The loss of audit exemption is an issue, which is why any possible solutions need to be properly analysed and costed.

dbran

Hi

So the target company pays a dividend to the newco who then repays the directors loan. This will be fine so long as the company has distributable profits and there is a sufficient credit directors loan balance in the newco.

Regarding the previously available relief for interest on a loan taken out for investment in a company you mentioned, there is an exemption under s60(13)

(13) Nothing in this section shall be taken to prohibit—
(a) where the lending of money is part of the ordinary business of the company, the lending of money by the company in the ordinary course of its business;
(b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid shares in the company or its holding company, being a purchase or subscription of or for shares to be held by or for the benefit of employees or former employees of the company or of any subsidiary of the company including any person who is or was a director holding a salaried employment or office in the company or any subsidiary of the company;
(c) the making by a company of loans to persons, other than directors, bona fide in the employment of the company or any subsidiary of the company with a view to enabling those persons to purchase or subscribe for fully paid shares in the company or its holding company to be held by themselves as beneficial owners thereof.

Nor would it apply if you are actually investing with your own money in the company and therefore not getting assistance from the company to make the investment.

Regards

dbran

dbran

smeharg wrote: »

S60 acts to prevent the situation where the company is liable for repayment of loan. That is not what is being suggested here.

That is not what section 60 says. It goes further then this.

It says :

60.—(1) Subject to subsections (2), (12) and (13), it shall not be lawful for a company to give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company, or, where the company is a subsidiary company, in its holding company.

The company does not have to assume a liability, it can be just the giving of a loan to the person.



Kind Regards

dbran

smeharg

dbran wrote: »

Hi

So the target company pays a dividend to the newco who then repays the directors loan. This will be fine so long as the company has distributable profits and there is a sufficient credit directors loan balance in the newco.

Regarding the previously available relief for interest on a loan taken out for investment in a company you mentioned, there is an exemption under s60(13)

(13) Nothing in this section shall be taken to prohibit—
(a) where the lending of money is part of the ordinary business of the company, the lending of money by the company in the ordinary course of its business;
(b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid shares in the company or its holding company, being a purchase or subscription of or for shares to be held by or for the benefit of employees or former employees of the company or of any subsidiary of the company including any person who is or was a director holding a salaried employment or office in the company or any subsidiary of the company;
(c) the making by a company of loans to persons, other than directors, bona fide in the employment of the company or any subsidiary of the company with a view to enabling those persons to purchase or subscribe for fully paid shares in the company or its holding company to be held by themselves as beneficial owners thereof.

Nor would it apply if you are actually investing with your own money in the company and therefore not getting assistance from the company to make the investment.

Regards

dbran

The whole original point of this thread was that the company would have sufficient profits to repay the loan but only if those profits could be extracted without deduction of income tax.

The company is't making a loan. The ultimate shareholder (and director) is making the loan. The target company is making a distribution to its shareholder ie newco. Newco repays the shareholder/director.

S60(13) allows a company to finance shares in itself in certain circumstances (as you've quoted). It has nothing to do with getting a loan from a bank to invest in an un connected company.

smeharg

dbran wrote: »

That is not what section 60 says. It goes further then this.

It says :

60.—(1) Subject to subsections (2), (12) and (13), it shall not be lawful for a company to give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company, or, where the company is a subsidiary company, in its holding company.

The company does not have to assume a liability, it can be just the giving of a loan to the person.



Kind Regards

dbran

Sorry that was badly phrased.

What I meant was it its to prevent a loss being incurred by a company as a result of loan made by it to invest in itself. Ie if it makes a loan and it is not repaid.

I don't think there has been any mention in this thread of the company in question making a loan?

barneystinson

dbran wrote: »

smeharg wrote: »

S60 acts to prevent the situation where the company is liable for repayment of loan. That is not what is being suggested here.

That is not what section 60 says. It goes further then this.

It says :

60.—(1) Subject to subsections (2), (12) and (13), it shall not be lawful for a company to give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company, or, where the company is a subsidiary company, in its holding company.

The company does not have to assume a liability, it can be just the giving of a loan to the person.



Kind Regards

dbran

I don't agree with this analysis.

The bank is financing the purchase of the shares, they're the ones giving a loan. (And in this regard the loan could just as easily be made to the holding company with the director guaranteeing it, rather than a loan to the individual.)

The individual then applies the loan to effect the purchase of the target co shares, by advancing it to his NewCo. as a directors loan. So that's a 2nd loan, if you like.

As Smeharg has pointed out, the payment of dividends by the subsidiary to it's parent out of distributable profits, is entirely up to the companies involved.

The target company isn't loaning anyone money, nor is it providing any guarantees, security etc... It merely trades and pays dividends out of it's profits.

dbran

Hi Smehard and Berneystinton

As mentioned before if target company is paying by way of dividends then this changes everything and there is no problem.

Kind Regards


dbran

Mr. Incognito

nino1 wrote: »

i am thinking of taking out a personal loan of 150,000 over 5 yuears to buy a business making a net profit of 50,000 yearly. the business needs cash flow of 5000 from the net profit leaving 45,000. My loan repayments will be 34000 yearly.
in order to use this balance of the net profit to make repayments for the loan i assume the 45,ooo would be due to regular income tax, taxed at the higher rate in my situation and result in only around 22000 available for the repayments.

is there a more tax efficient way of doing this where the net profit can be used the make the repayments in full.

is itpossible to get a business loan where the profits of the business are used to make the repayments without being subject to income tax?

First thing that should jump into any professional advisors head reading this is BES Relief. This is an income tax relief for investments into specified companies of up to €150,000 per annum. They investor must not however be "connected" with the company so you cannot directly purchase the company but there are structures that one could use to take advantage of this.

I would however charge you for this advice in real life so I don't see why I would give you the answer. Pay a professional.

Secondly:

I do not see why people are advocating setting up companies and holding companies and intercompanies loans etc.

First off, Barney.

You are advocating setting up a company to purchase the shares??

The tax flow on the earnings will be

Company A - Corporation Tax on profit- money flows to Company B Corporation tax AGAIN (although technically this is franked income) and then withdrawn by the Directors - Income tax on this. There is no tax benefit to this structure.

Also I see a lot of arguing of Section 60. Section 60 is in respect of a company purchasing its own shares and the restrictions are to prevent a company artificially increasing it's own share price by purchasing it's own shares. Unfortunately there are no restrictions on companies doing this when they are in the business of lending money. With respect this is a red herring.

In addition the interest relief on the loan was always dependent on the type of loan in the first place, and the interest thereon and is now gone in any event.

Look............

Bottom Line. Is there a way to structure this in a tax efficient manner. Yes.

Are you going to get a free lunch here. No.

The new company doesn't really help here.

barneystinson

Mr. Incognito wrote: »

First off, Barney.

You are advocating setting up a company to purchase the shares??

The tax flow on the earnings will be

Company A - Corporation Tax on profit- money flows to Company B Corporation tax AGAIN (although technically this is franked income) and then withdrawn by the Directors - Income tax on this. There is no tax benefit to this structure.

If you read my post I didn't say it was the MOST tax efficient structure, it was simply an example of a more tax efficient structure than repaying a personal loan out of salary.

There would be no income tax on withdrawal of money by the director from the holding company, as it would be repayment of a director's loan.

So in the OP's original position they are paying IT @ 52% on the funds required to repay the loan, whereas under my example of a more efficient setup, they pay CT twice, at 12.5% and then at 25%. Not the most tax efficient (which as you say, they'll need to pay for) but merely an example of something more tax efficient.

Ah nuts

op buys 2 shares in new company for 4euro.

Then gives this company a loan of 150k which is used to buy assets of target company.

Cash flow of new company is profit 50k
Less tax of 6.25k less capital required of 5k.

This leaves repayment capacity of 38.75k back to op till 150k mark is reached with no personal tax implications . This will leave the op short his own personal element of 20k but he can take this out in salary in the fifth year.


that is my take on it but please seek professional advice as it is necessary in this area.

Mr. Incognito

Ah nuts wrote: »

op buys 2 shares in new company for 4euro.

Then gives this company a loan of 150k which is used to buy assets of target company.

Cash flow of new company is profit 50k
Less tax of 6.25k less capital required of 5k.

This leaves repayment capacity of 38.75k back to op till 150k mark is reached with no personal tax implications . This will leave the op short his own personal element of 20k but he can take this out in salary in the fifth year.


that is my take on it but please seek professional advice as it is necessary in this area.

This is wrong.