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Incorporation: Partial directors’ loan account repayment was a distribution

By Mark McLaughlin, August 2020

The proceeds of sale on a business incorporation, which were credited to a directors’ loan account, were considered partly to be an income distribution to the extent that the sum actually repaid by the company exceeded the value of goodwill.     

Background 

A partnership business of husband and wife sold all its assets to a related company (HFPL), with effect from 1 May 2011. HFPL was established for the purpose of incorporating the partnership, which was driven by commercial considerations. 

The value attributed to goodwill on sale, which was credited to the directors’ loan account, was £1,199,043. This was based on a calculation carried out by the appellants’ former agents. The calculation was based on two years of actual sales, gross profits and net profits and two

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