Loan from my Ltd.

[b0redom]

Hi,
I currently have a bigish lump of cash on deposit in my Ltd. I want to buy a BTL property. I am currently looking into raising capital by remortgaging my domestic property. Instead of that, given that I'm making no interest on the Ltd deposit, is there any reason I can't loan say 40k to myself at the prevailing rate of interest, say 6%?

As I'm not taking the loan at a preferential rate, I don't believe that there would be a BIK to pay? I would look to set this up in an identical way to a 'normal' bank loan over a number of years.

Am I missing something obvious?

Cheers....

b0redom

[northernladuk]

Yeah, the search button.

[Wanderer]

Lots of accountants seem to advise against ever taking a directors loan of more than £5000 though I found a piece on the facts behind the director’s loan account which does some straight talking on the subject which is interesting.

Am I missing something obvious?

It's a great idea, the interest the director needs to pay to avoid the BIK is low, currently 4% and can be paid back to the director as company profits, but as you suspect, this has been thought of before and the government didn't like what they saw so there is a catch in the form of S455 of the Corporation Tax Act 2010...

The catch is that if the loan is outstanding 9 months and 1 day after the company year end, then a charge of 25% of the loan amount is payable, often called the S455 charge. This charge is refundable once the loan is repaid, but this doesn't happen immediately on repayment of the loan so it represents a major stumbling block and it was deliberately designed to prevent directors taking long term loans.


So, what are the alternatives? Can a company fat with retained profits buy a house as a buy to let? I'm sure this opens a completely new can of worms and it's been discussed already but I have to wonder why not? Capital gains tax on the property, maybe?

[b0redom]

I previously looked into buying a B2L through the company, and it was a real can of worms. Corp mortgages seem to be a bit of a minefield, and I was advised that it may change the type of the company from a trading company to an investment company.

I'm still not convinced that it's not a bad idea to loan money from my company. Sure there appears to be a 25% corp tax on the loan temporarily, but as long as you have funds to cover it, I don't see a major problem.

[tractor]

...

There used to be a number of pension products that would seemingly overcome the S455 issue in that if you had invested enough in your pension plan, you were able to 'borrow' from it.

I don't know the ins and outs or indeed if they are still available post Robert Maxwell lol. Do a search on it, might be a dead end though.

[Greg@CapitalCity]

Am I missing something obvious?

Just to reinforce what Wanderer says, there are two things to consider;
(1) Paying interest at the HMRC prescribed rate of 4%, to avoid any BIK charge, back to your business;
(2) If the loan is outstanding > 9 months and 1 day after the company year end in which it was taken, S455 tax will apply (on £40k this will be £10k). It gets added to your Corp Tax liability for the year, and on the £40k you will only need to pay this once. The S455 tax is refunded once the loan is repaid, which some clients prefer to do on closing down their company.

You can come unstuck with item (2) below, so make sure you have enough cash to cover the S455 liability.

We have not yet seen a contractor buy a house using their own limited company. Tax issues and trading/investment issues aside, there does not appear to be a single lender in the market who will do this, regardless of the size of your cash pile.

[Contreras]

OK, so use the HMRC prescribed rate, but how is this applied in practice?

I tried searching for some detailed guidance on this but in the end it left me with more questions than answers.

From the useful link that Wanderer posted above:

There are two ways of calculating the cash equivalent value that produce the same result where the amount outstanding remains constant; however this rarely applies in the real world.

1. The averaging method
This method takes the balance due on 6 April (at the beginning of the fiscal tax year) and the balance due on 5 April (at the end of the fiscal tax year) and applies the official interest rate on the averaged amount.

2. The daily method
This method records the detailed movements of the amounts due and works out daily interest on each amount.
This is a more complex calculation and often results in a higher cash equivalent amount.
The cash equivalent amount is reduced by any interest paid by the director; and there is no reduction if the loan is overpaid resulting in the company owing the director money.

What determines which method is used?

With the averaging method, using the above description as a strict definition, if the DLA balance was zero at both the start and end of the fiscal year then the interest is zero even if the balance exceeded £5k at some point within the year. That's not right, or is it?

Say the OP has their £40k BTL loan at the start of the year and then pays back £38k just before year end, the averaged amount is (40k+2k)/2 = 21k, so effectively they pay close to 2% interest (ie. half the HMRC prescribed rate). Are HMRC OK with that?

Whichever method is used, how does one arrive at the % rate to use for a periods other than a full year? The few worked examples I have come across use either (rate*n_months/12) or (rate*n_days/365), which means that for short term loans the effective APR will be higher than the prescribed rate albeit not by much.

[Notascooby]

Yeah, the search button.

You must spread some Reputation around before giving it to northernladuk again.

[Greg@CapitalCity]

OK, so use the HMRC prescribed rate, but how is this applied in practice?

The default is the averaging method. You can (by election) use the precise method, though in practice the averaging method is simpler and faster. Take a look here for more info on this;
The benefits code: beneficial loans: calculating the cash equivalent: the precise method: consult an Inspector in important cases

[Wanderer]

OK, so use the HMRC prescribed rate, but how is this applied in practice?

From the useful link that Wanderer posted above:

What determines which method is used?

The one that makes the most money for HMRC of course!!

Seriously though, a bit of common sense is applied and the averaging method is only used in a "straightforward case where the loan is repaid in regular sums or the amount of the loan remains fairly constant throughout the year". See EIM26225 for HMRC's guidance of when you can use what they call the "Averaging method".

The alternative is to calculate the interest on the maximum daily value of the loan which HMRC call the "precise method", see EIM26230.

If HMRC ever audit you they can elect to use this method if they choose and you can bet your boots that if it will net them more tax then they will use it to recalculate the interest then hit you with a bill for the BIK, perhaps with interest and penalties if you should have known better.

Unless this is a straight forward loan with fixed monthly repayments (rather than a flexible loan arrangement to cover void times in your rental income), then I suggest that you go ahead and use the "precise method".

Heck, there is probably not much difference between the two and if you are taking this loan over a fairly long term then you will almost certainly get audited at some stage in the future so keep it clean and have a quiet life...