Keeping it personal

KEY POINTS

• Problem in obtaining finance.
• Personal account to replace company account.
• Possible benefit-in-kind charge on the director.
• Evolving a strategy.

One of the anomalies of the current economic situation is that banks and similar financial institutions are unwilling to pay the level of interest on a deposit account in corporate ownership that they offer to individuals.

This is understandably causing irritation to directors where significant cash reserves are kept, particularly for family companies where the corporate economics are felt at a personal level.

Inevitably, director/shareholders are looking to place funds in their own name to circumvent this. This article examines the routes available and the tax consequences.

It poses the question “what is the solution?”, but concludes there are more questions than answers.

To formulate potential solutions, it is necessary first to identify the key issues of each option.

Company deposit account

This is the option that companies are trying to avoid, but the following reminders of the characteristics of a company deposit account will help set the basis against which the alternatives can be measured. 

• It is easy and quick to set up.
• The funds are readily accessible to the company as signatory.
• It could minimise the danger of being classed as an investment company by being on short-term call, hence available for working capital, rather than on long-term deposit.
• Interest rates are poor, because the range of savings products available to a company is limited compared with an individual. It is important to bear this in mind when communicating with the bank, because it explains why banks are unlikely to have the facility to offer these products to companies. It is not just a matter of striking a better bargain with the bank manager as in the case of taking out a loan.

Personal deposit account

This is the type of account that started directors pondering. The range of savings accounts open to individuals is much greater than for corporates.

Interest rates of 3% or 4% are regularly available where the size of deposit and length of term are optimised.

It is understandable that director/shareholders of family companies would hit on the idea of placing the funds in their own names, knowing that they will not draw on the cash personally and that interest will be declared as the company’s. The downside is the tax issues that emerge.

First, beneficial ownership is the keystone for tax liability.

However meticulous the director/shareholder is in treating the funds as belonging to the company and in crediting to it the ensuing interest, HMRC will regard the individual as the beneficial owner if he opened the account, instructed the bank and there is no evidence to counter the position.

HMRC provide examples of their view on the person chargeable to tax on interest in their Savings and Investment Manual at SAIM2410.

Second, the funds invested would be viewed primarily as a loan to a participator.

Corporation Tax Act 2010, s 455 applies, with a 25% corporation tax charge levied, repayable later by HMRC when the loan has been repaid by the director.

The dates are critical in that, if the loan is repaid within nine months of the company’s year end, the charge will be avoided, although it must be disclosed on the CT600 form.

Similar timing works against the company when HMRC subsequently repay the 25% tax charge, because it will not be made until nine months after the end of the accounting period in which the funds were repaid to the company.

Even then, HMRC will make the payment only when a claim is made.

Third, the benefit in kind rules will operate to make it a P11D reportable transaction, being an interest-free loan.

A tax charge will fall on the director based on the HMRC official rate of interest, currently 4%. The only way to avoid the tax would be for the company to charge the director the same rate of interest.

Finally, the close company rules could hit even harder if the funds were invested by a shareholder who is not a director or an associate of one.

Although unlikely that HMRC would take the point, under CTA 2010, s 1064 the provision of any benefit or facility of whatever nature could be deemed a distribution.

Nominee for the company

To circumvent the beneficial ownership problem, steps could be taken so that the director/shareholder merely acts under the instructions of the company.

One route is for the director placing the funds with the bank to be a nominee for the company.

In those circumstances, the loan to participator and close company rules would not apply. The key factors here are as follows:

• To convince HMRC that the beneficial ownership has stayed with the company, it should be documented. A board resolution should record the decision that director X was to act on the company’s behalf with the bank and set out the investment the director should make.
• The account name ought to be that of director X as nominee to X Limited.
• The bank should similarly accept that the beneficial ownership remains with the company – hence back to square one. In reality, funds belonging to a corporate entity were being deposited so the range of investment products would be limited accordingly.
• Need it be disclosed to the bank that director X was acting as nominee for the company? Yes, especially where a higher rate of interest would be obtained than if the true position were revealed. Not to do so could represent a form of deception.

Bare trust

A bare trust is recognised in general case law as a trust, where the beneficiary (the company in our context) has an indefeasible interest in the trust property (the investment funds) as against the trustee (the director).

The beneficiary requires the trustee to act as a repository for the property, while the property remains the entitlement of the beneficiary/company.

A similar position is achieved as with the nominee route:

• Appropriate documentation is needed, setting out sufficient detail for the bare trust structure to be established, preferably by a formal deed.
• HMRC would accept that the beneficial ownership of the deposited cash remains with the company.
• The unwanted tax consequences would be prevented.
• As above, unless the bank manager misunderstands the reality of the arrangement, he must limit the investment options to those available to companies.

The solution

There probably is no solution, but the director will have to consider the following issues when he is looking to obtain a good rate of return on company funds.

Is there a bank that would open the type of investment account targeting individuals where it was transparent that there were company funds behind it?

This is unlikely but, if time and effort is deemed worthwhile, researching the proposition directly with banks might be fruitful.

Is there a bank that will break ranks and offer a reasonable rate of interest on company funds? Given the feverish competition between financial institutions, it might be only a matter of time before this happens.

Other commercial issues should not be forgotten, especially the security of investing substantial funds in a single depository and the limitation of the funds guaranteed by government if the bank were to fail.

What about invoking the tax scenario defined above, but as part of a strategy? It would depend on individual circumstances, but consider, what if:

• A loan deed were prepared between the company and director X so he had a right to use the funds.
• The director found a lucrative investment opportunity so he gained a substantial return on the funds borrowed. The income would rightfully belong to him. Maybe there would be a spouse or (adult) offspring on a low rate of tax in whose name the investment(s) could be made.
• Twenty-five per cent of the loan value would be paid to HMRC under CTA 2010, s 455, but it would not be permanently lost as tax. Once the director repaid the loan the tax would be recovered from HMRC. The company’s cashflow should not be an issue, because the premise is that it has spare cash which was not earning interest anyway. Carefully considering the dates of the loan and the repayment under the nine-month rule would optimise the position.
• Paying tax on the 4% benefit-in-kind charge might be worthwhile overall. Or perhaps the company could charge interest to the director.

Using the funds wisely could prove to be a bargain, particularly if the access to cash meant the director had a lower requirement to extract it from the company by standard means.

The net tax cost might be less than if the company paid dividends to an individual in a year when he is on the top rate of tax.

This article may seem to raise more questions than answers as to how to obtain the best rate for company funds, but director X now has his framework to determine his own solution.

Annette Morley CTA is a director of Wellden Turnbull Hextall Meakin and can be contacted on 01722 432355 and by email

Issue: 4373 / Categories: Comment & Analysis , Business , Income Tax