In the alphabet soup

Company A is a trading company wholly owned by Mr and Mrs A. Company B was set up as a vehicle for their son Mr B who has a controlling interest in this company (he owns 60% of the share capital).

Company B is a property dealing company and Mr and Mrs A have personally provided loans for the purchase of properties. They are also directors and minority shareholders in Company B (they own 40% of the company). Mr B makes the key decisions and has a hands on role in the business. Mr and Mrs A have little involvement in the running of the business and stand to be rewarded less than Mr B because of their minority interests.

HMRC are saying that companies A and B are associated for corporation tax purposes because of the loan relationship. Company A is profitable in the marginal rate of...