Can my limited company loan money to another limited company?

Of course it is the case that a limited company can loan money to another company, but there are quite a few things to consider.

And because company-to-company lending is a huge topic, our guidance on loaning money from one company to another will focus on the scenario where a sole shareholder director owns two UK trading companies, writes Eloise Brown, senior tax knowledge manager at chartered accountancy firm Moore Kingston Smith.  

Legal considerations

Firstly, the loan must be lawful from a company law perspective. The directors have a number of statutory duties, including the duty to act within the company’s constitution, to exercise their powers for a proper purpose, and to promote the success of the company. Practically, this means that the company’s Articles of Association must permit the loan and that the lending company must have sufficient reserves.

Contractors should ideally get some legal advice to confirm these pointers before they make any firm decisions.

Beware the participator rules

From a tax point of view, a contractor-director should consider the ‘loans to participators’ rules (often referred to as ‘s455’). These rules most commonly apply when a company loans money to an individual shareholder or their associate and the loan is left outstanding.

If the rules apply, a 32.5% tax is charged on the amount of the loan outstanding nine months after the accounting date. There is an extension to this rule which applies if a loan is made which is not caught by the main rule described above, and after the loan is made, a payment is made to a participator or an associate of a participator in the company by another person (i.e. the borrowing company).

Proximity, decision and exemption

This charge would not apply unless there is a close link between the loan and the payment. For instance, if the loan is made to fund a dividend payment to the shareholder or an associate of theirs from the borrowing company, and the payment is not subject to income tax in the recipient’s hands. It would therefore seem unlikely that this would apply, but is something which should be considered depending on the circumstances.

The contractor-director would need to decide whether the loan should bear interest. Assuming the transfer pricing rules (which impose arm’s length basis adjustments to transactions between connected UK entities), do not apply because of the small and medium-sized enterprise exemption, there is no requirement that the loan bears interest, although this may be preferred.

Debit/Credit

Provided that there is an expectation that at some point in future the loan will be repaid, it should be a ‘loan relationship’. This means that the lending company will be subject to corporation tax on interest receivable, and the borrower will get tax relief for interest payments. In the event that the loan is written off in future, you should be aware that as the companies are connected, the ‘debit’ which would appear in the lending company’s accounts would not be tax deductible, while the ‘credit’ in the borrower would not be taxable. Depending on the circumstances, HMRC may consider that what has in fact happened in this scenario is a distribution to the shareholder, with no tax relief obtained and the shareholder subject to income tax on the amount written off.

Final (taxing) questions

If the loan is interest bearing, you should make sure that the rate of interest is not excessive, since this can also lead to the amount considered to be excessive being treated as a distribution by HMRC.

In summary, making a loan from one company to another is possible and would avoid the double tax charge which would apply if you draw money out of one company first and then lend it to the other company yourself. The guidance given here cannot cover all the issues and you should as always take legal and tax advice first.