The client had taken a loan out on his home which he then, after a delay, used to set up a company. He established a limited company, owned entirely by himself and his wife, and loaned the firm the money he had borrowed. The company then loaned out the money at a higher rate of interest to several parties and is making repayments which he then uses to meet the payment due on the mortgage.

It seems he has an asset – the loan to the company – which could potentially count as capital for council tax benefit and which presumably could be sold. Initially I’d assumed it couldn’t count as a business asset since the loan seems to be clearly his asset and the companies liability but now I’m not so sure. Could he count as self-employed for the purposes of sched 5 para 8 of the CTB regs? And if so could the capital be disregarded?

If the capital counts how should it be valued? There is nothing on paper setting out the terms of the loan and the firm would be unable to pay up in full in the foreseeable future. How saleable is such an asset and does anyone know who might buy it?

He is certainly not self employed - he's a director (presumably) of the limited company. However, reg 39(5) could allow him to be treated as self employed. Havn't quite got my head around whether that would be advantageous to him....

Simon Ennals

It was seeing that bit which made me think maybe he could benefit from the self employed disregard bit but I think it only applies for disregarding the value of his shareholding and wouldn't help with the loan issue. The loan is for a 15 year term. There is nothing in writing. Is there a market for such a thing? Anyone know who might make him an offer?

the shareholding is capital.

soudns like he might need the advice of an insolvency practitioner...or at least an accountant!

Tue 04-Mar-08 11:27 AM by Gareth Morgan

Can we step back a little.

What kind of loan did he take out on the house?

Conventional mortgage or equity release?

How old is he?

re- mortgage for a larger ammount than the original mortgage so as to 'release' equity

OK, thinking aloud here...

In the absence of any agreement with the company, would this be money available upon demand? If not, then there's no immediate value to the loan. I wouldn't think there's any deprivation argument either, particularly as the money is released from a disregarded capital item anyway.

It seems to me therefore that the capital asset is the company.

Does the company have a value? Yes.

What is the value? What someone would pay for it less 10%.

What would they pay? A starting point is to look at the physical assets of the company (buildings, chairs etc.) plus the business value, in this case money loaned out less the liability for money borrowed to make loans. In this case that seems likely to be a small net value, if any.

I can't see how you could assess the value of the loan made, to a willing buyer, at other than a small value if there's no right of repayment on demand.

Silly question I know: but why on earth did he do this? It seems a very odd idea to use a roundabout way of lending raising money to lend out to repay so he can pay for the cost of borrowing it. There must be more to it that that. Is it some sort of tax dodge? Someone must have thought this one up for him, I assume, but I don't think it can have been a solicitor due to the absence of written agreement (I hope!)

What is the company for and what is it doing? To whom has it lent his money and why?

The reason why I am wondering all this is that if there is any evidence that the whole thing is dodgy a court might think it appropriate to "pierce the veil of incorporation"; ie, ignore the legal fiction that a company is a person totally separate from those who own it and those who control it.

It just gives me an uneasy feeling, that's all.

and following up from ariadne - have you seen all the paperwork? have you had your training re money laudering and all that stuff?

He had intended to set up as a sole trader but on the advice of an accountant set up a limited company instead. He makes a small profit on the margin between the rate at which the firm borrows (from him) and the rate at which he lends (unsecured). Seems a risky business strategy to me for little return but it has made him a small profit and there have been plenty of people willing to say Northern Rock had a sound business model so who can say!

I'm not so concerned about his shareholding which I think is of little value as I am concerned about the debt the firm owes him which could be worth a lot more. Presumably he can sell this in the secondary debt market but I am only aware of such a market in relation to more sizeable companies: corporate bond markets etc. Is there any market at all for a debt such as this?

How much is the debt?

Over £100K

You said "He makes a small profit on the margin between the rate at which the firm borrows (from him) and the rate at which he lends (unsecured)".

Does this mean the company makes that as a gross profit and then pays him either as an employee or by dividend?

Yes

Er, which? IOW is he an employee as well as a director?

He gets remuneration as a director. Other than as income do you think this is significant?

I was wondering if he's an employee and how many hours he works if so. It could open up a number of possibilities of course.