Business owners should be mindful of bear traps

MoneyMarketing reports “The loss of trade caused by the Covid pandemic will have led to a cashflow shortage for many businesses. Smaller and more vulnerable businesses will have felt this lack of cash most keenly, and owners or directors may have lent personal funds to the business to maintain its viability until market conditions improve.”

“If the director were then to die while the money remains unpaid the business, and the estate’s executors and beneficiaries, are all placed in an invidious position.” “Executors would be wise to preserve the value of the loan by extracting the cash from the business promptly.”

The article reports on the  tax bear trap. “Adding complication to distress there are also tax bear traps of loans to businesses. If the business fails and the loan cannot be repaid to the director, the loss relief on the loan is much less generous than the loss relief they would be entitled to if they held shares. A loss made on a loan to a trading company potentially qualifies as a capital loss, with maximum tax relief of up to 28%. A loss made on shares is also a capital loss but can be offset against income and potentially provide tax relief of up to 45%, subject to certain conditions being met.”  Read more