Dad owed money: will it affect pension credit?

lookingforguidance · 6 March 2018 at 4:20PM

Been drinking a lot of :coffee: trying to work this one out.

Any thoughts or help much appreciated.

Short story

My dad's only income is a small state pension, and occasional work through his company (he is director and sole employee). The payments he gets from the company are technically repayments on a director's loan account he has with the company. Is this income? Earnings? Savings? The answer will affect whether or not he is entitled to pension credit.

Details

Okay, so Dad is 78, lives in England and gets a state pension of about £93/week. I'm trying to help him put together an application for pension credit. He is struggling to make ends meet at the moment and this is one of several avenues my sister and I are going down to try to help him out. We are in our mid-20s and cannot afford to help him financially yet.

Here's the situation. He is still working as the director of his transportation company (he is sole employee). This is his only other source of money apart from his state pension. The company was once highly profitable, now sadly does almost no business, perhaps one job per year, making £3,000-£4,000 on that one job, and has few assets.

He does not get a salary from this company: he has a directors loan account with the company (over £20,000). Whenever the company makes money (about once a year, as I said above), he is able to get a part of that loan repaid.

The question is: what is the status of that money? We are trying to work out in advance whether it is going to be considered as income or not in an application for Pension Credit. If it is, he get's pension credit. If not, he doesn't.

This is money he earned in the past then lent to his company to keep it afloat. There are no interest payments on the directors loan, so he is recouping capital, not making money by charging interest. So is it 'income'? Or should it be considered savings? But it's not really savings as the company could go bankrupt at any time.

What do y'all think? Thanks for any help you can give. I have been looking into this for a few weeks now and several pension service reps have confirmed over the phone that this is a bit of a grey area. I know the only thing we can do next is to make an application and see what happens. But forewarned is forearmed and if anyone can give advice or share their own experience or thoughts we would be really grateful. As you might be able to guess from the fact he is still working at 78, Dad has not got much of a fallback, no company pension and no savings. He is a homeowner lost most of the value of his house in a divorce.

Thanks again,
Tom

P.S. I know his state pension is less than the maximum and we are looking into that separately. My question here is about the status of his directors loan and the loan repayments. Thanks a lot.

lookingforguidance · 6 March 2018 at 4:28PM

Should have mentioned: of course I'm aware that the only way to know for sure is to make a claim. We will do so and declare everything openly. But Dad has a pretty big "pride barrier" about these things (claiming benefits, etc) despite hardly being able to afford heating in wintertime. So it will really help me and my sister to know what we can reasonably expect from this process in advance of presenting it to him as an option. Thanks again for any insights.

xylophone · 6 March 2018 at 4:53PM

https://www.gov.uk/directors-loans

Read

https://www.ageuk.org.uk/globalassets/age-uk/documents/factsheets/fs48_pension_credit_fcs.pdf

lookingforguidance · 6 March 2018 at 5:27PM

Thanks for the links @xylophone. They confirms that interest on loans is of course counted as income.

But my question is about the repayment of the loan capital. Doesn't seem to be covered in the factsheet you posted or the more detailed technical guidance I found on the gov website (google "A detailed guide to Pension Credit for advisers and others")

lookingforguidance · 6 March 2018 at 5:36PM

Another way of asking the question: is money owed to my Dad by his near-bankrupt company an asset? Capital? What's it's status?

pmlindyloo · 6 March 2018 at 6:43PM

I have found this on the Decision Maker's Guide for Pension Credit.

Limited companies
84125 A companys capital is owned by the company. Directors of the company are not the beneficial owners of the capital of the company.
84126 If a director has lent capital to the company the loan is included in the capital of the company. The directors rights to the capital that has been lent are included when working out the directors capital.
84127 If a director
1. has shares in the company and
2. is the sole or joint beneficial owner of those shares
the shares will be included when working out the directors capital

If I am reading it correctly then the loan to the company (lent by your dad - the director of the company) - is included in the director's capital.

As for the money he receives from a job then I believe this would be classed as income.

Trying to be logical the loan is, in effect, money he put into the company so still his capital. Can he actually remove this money from the company?

The money he receives from a job is earnings.

I am not an expert on this area so would advise applying for PC anyway and seeing whether he would be eligible.

Perhaps, also, it would be worthwhile speaking to his accountant and consider winding up the company/selling the company. Is this a possibility?

Apologies if I am way off the mark with any of my suggestions.

PS Have removed the apostrophes as they take on a different format on this site at the moment. Didn't want you to think my grammar is rubbish (although it can be!)

WhenIam64 · 6 March 2018 at 6:59PM

Seems straightforward from an accounts point of view but it will have impact on benefits

The directors loan is counted as capital unless there is a likelihood of it not being repaid e.g company being wound up.

Any interest on the loan is income

Any payments from the company for work done as an employee is income

Any payment for expenses would not be income if they are backed by receipts

However has the loan (which counts as capital) been declared for say housing benefit? Will it take your father over the capital limits? If capital is relevant to some benefits and hasn't been declared is that because there is a possibility the loan won't be repaid or was it just forgotten about?

You'll need to do a bit of clarifying on the amounts and the benefits claimed but the turn2us site is useful in this regards

lookingforguidance · 7 March 2018 at 11:40AM

Thanks pmlindyloo -- not off the mark at all, this is really helpful.

Thanks for making me aware of these decision makers guides, I've found some useful information and learnt some useful new terms like 'Rights to capital' and 'Beneficiary owner' which I think it will be useful to know as we move forward with this.

You're right at the end of the day we just have to apply and see what happens! And hope the decision maker who gets the case is looks into it with the attention to detail it deserves.

Winding up the company would certainly solve a few problems but he is just not ready to do that yet.

lookingforguidance · 7 March 2018 at 11:47AM

WhenIam64

Thanks When Iam64. Yes, will it be repaid, that is the question really. I think there is a pretty high probability of it not being repaid in full (it is already overdue by over a decade) which I will just have to hope the Decision Maker takes into account when he or she looks at the case.

He doesn't receive any benefits at the moment so we have never had to think about this before.

Again, "Any payments from the company for work done as an employee is income" sounds clear, but I feel it doesn't really cover this scenario, in which you could argue that all the money my dad receives from the company should be considered capital, not income.

Any other thoughts much appreciated (and thanks for the turn2us recommendation)

WhenIam64 · 7 March 2018 at 4:33PM

You are asking the perennial question in small businesses.

The theory is that if work is being carried out by the sole employee, then it should be at a least National Minimum Wage. Any invoiced income over NMW is gross profit from which costs should be deducted to give net profit which itself is taxable. Anything left after NI, Income Tax, Company Tax has been deducted will be available to pay down the loan.

Since most small business struggle to get to a level where NMW is payable, a lot of companies should report themselves for Modern Slavery but that is the theory.

If your father wants to work it another way then best chat to the decision maker on it.

Whiteknight · 8 March 2018 at 12:11AM

As your father is a company director when he claims Pension Credit they will need to arrange for a home visit to complete some additional forms (B16 and additional questions regarding him being a company director) He will also need to provide a full set of accounts.

Dad owed money: will it affect pension credit?

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