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bigduckontax, Accountant
Category: Tax
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I will be a number of investors investing in a UK company to

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I will be a number of investors investing in a UK company to purchase some land on which we will obtains planning permission. Once the planning has been obtained we will sell the land and distribute the profits based upon the level of initial investment. All the paperwork is being prepared by our solicitors including the shareholders agreement. However it has now been suggested that each shareholder should be credited with a rate of interest of 5.5% above the Bank of England base rate for the period in which their monies are invested i.e. until the land is eventually sold. The interest would be accumulated and paid out with the final distribution. The company would of course make provision for the interest in its accounts and claim it as a company expense.
My concern is that if the planning application took say two years and in that time I had two tax years I would have to declare that interest on my SA tax returns even though I was not in receipt of the actual interest. Is this correct and if so can you confirm under what area of tax legislation this charge is made?
My aim to discourage the company from introducing the interest and allow any distribution to be made only when the property is sold thus I need to quote the tax legislation on the payment of tax on notional interest.
Hello, I'm Keith and happy to help you with your question.
If no interest has actually been paid out then there is no income to declare in either the UK or SA. SARS advises that:
'Investment income, such as interest and foreign dividends'
is taxable, but if there is no income there is nothing to tax so the situation is the same in both jurisdictions. Notional interest is a concept alien to both countries and outside the scope of taxation altogether.
Furthermore, a Doubly Taxation Treaty is in force between the UK and SA, the aim of which is to ensure that the same income stream is not taxed in both countries. This is achieved by means of tax credits, any tax deducted in one being allowed as a tax credit against any liability in the other.
Thus whichever way the tax cat jumps you will only be taxed once on any interest when actually earned save for variations in individual tax rates between the UK and SA.
I am of the opinion that you are well advised to discourage the actual payment of any interest until the property is sold.
Please remember that as far as UK taxation is concerned Capital Gains Tax may apply to any gain made in this transaction, but as you are an SA resident this will be from a 6 April 2015 valuation only [part of the 2014 Budget]. Again the Double Taxation Treaty kicks in to ensure only one taxation strike, but, of course, capital gains are part of the SA Income Tax regime, not a separate tax as it is in the UK.
I do hope I have shed some light on your possible taxation exposure.
bigduckontax and other Tax Specialists are ready to help you
Customer: replied 3 years ago.
Sorry I may have confused you by SA, I meant my Self Assessment Tax Return not South Africa. I am a UK resident and have been throughout my life.
I appreciate that there will be a CGT liability on any profits made.
How will the company be able to make a provision in there accounts as an expense for tax purposes, if the the individuals (including myself) do not have to make a declaration on our tax returns of the interest charged by us to the company and pay tax on that interest.
Right, off we go again. You cannot be taxed on notional interest, it does not exist in the UK Income Tax regime.
The company can make a provision for a latent liability in its creditors accounts, either in the short or in the long term. The accounts of the company and the individuals tax positions are entirely separate and discrete matters.
As far as you investors are concerned no interest is earned nor need to be declared until it is distributed, but the company, an entirely different legal entity, is at liberty to make provision for a possible liability in its accounts; indeed, it would be improper not so to do.
Customer: replied 3 years ago.
Many thanks. I had been of the opinion that a notional tax liability existed but know I know.
Delighted to be able to shed some light for you.
Thank you for your support.