Director Loan repayment with Dividend Income - Tax implications

[coolguycp1]

Taking a personal loan at 6% to repay a loan that you would pay 3.25% on doesn't seem to be smart to me. Maybe I'm missing something here.

Just to explain a bit more, the company’s tax year runs until 31st October. I have already repaid £4K off the £10K directors loan from my dividend income.

If I understand correctly, if I decide not to repay any further to my directors loan account for my current tax year, i.e., until April 15, I will have a BIK for the outstanding loan of £6K for which the company will charge me an interest @3.5% until the amount is repaid.

I can then repay the balance £6K in my next tax year (FY15-16), and if I pay this amount before July 15 (9 months and 1 day after the company’s tax year), no S455 tax is to be paid, otherwise I have to pay a S445 surcharge @25% of £6K which shall be returned back to me in the tax year following the repayment of the loan.

Apologies if I have not been clear, but I now seem to understand why 3.5% interested rate is better than taking a personal loan.

[northernladuk]

Isn't it time you started speaking to your accountant??

[ContrataxLtd]

Just to explain a bit more, the company’s tax year runs until 31st October. I have already repaid £4K off the £10K directors loan from my dividend income.

If I understand correctly, if I decide not to repay any further to my directors loan account for my current tax year, i.e., until April 15, I will have a BIK for the outstanding loan of £6K for which the company will charge me an interest @3.5% until the amount is repaid.

I can then repay the balance £6K in my next tax year (FY15-16), and if I pay this amount before July 15 (9 months and 1 day after the company’s tax year), no S455 tax is to be paid, otherwise I have to pay a S445 surcharge @25% of £6K which shall be returned back to me in the tax year following the repayment of the loan.

Apologies if I have not been clear, but I now seem to understand why 3.5% interested rate is better than taking a personal loan.

Hi coolguycp

Let me get this right, you've taken a £10k loan from your company sometime this tax year and already repaid £4k via dividends therefore £6k is currently outstanding. YourCo year end is 31st October 2014.

As the loan has never exceeded £10k no interest needs to be charged and it's not a benefit in kind on you personally - just make sure nothing else accidentally took you over the £10k limit (overpaid salary/expenses etc.).

If you fully repay the loan by end July 2015 there will be no s455 charged so this gives you just under a year to clear the loan which hopefully would be possible? If not, you will pay s455 at 25% of the loan outstanding at the end of July.

Paying the s455 is only a cash flow issue, it won't actually cost you anything in the long run (forgetting opportunity costs of not having the money etc.).

So if you are struggling to repay the loan to your company this would probably be advantageous over taking a personal loan to clear it because you are still going to have to make repayments on the personal loan and will end up paying interest to the loan provider which will cost you money. This obviously assumes your company cash flow is strong enough to cope with lending HMRC some money for a year or two.

HTH

Martin
Contratax Ltd

[coolguycp1]

Isn't it time you started speaking to your accountant??

I would have, if my accountant would have been forthcoming with all this info even after asking him, but you probably might be aware of the added value that some accountants usually promise when asking for business but never quite deliver on those promises!

[northernladuk]

I would have, if my accountant would have been forthcoming with all this info even after asking him, but you probably might be aware of the added value that some accountants usually promise when asking for business but never quite deliver on those promises!

Indeed. Have been stung by that in the past so switched to SJD and don't have that problem anymore. Time to switch?

[TheCyclingProgrammer]

Taking a personal loan at 6% to repay a loan that you would pay 3.25% on doesn't seem to be smart to me. Maybe I'm missing something here.

I don't understand why you think OP would pay any interest on their directors loan.

[TheCyclingProgrammer]

Just to explain a bit more, the company’s tax year runs until 31st October. I have already repaid £4K off the £10K directors loan from my dividend income.

If I understand correctly, if I decide not to repay any further to my directors loan account for my current tax year, i.e., until April 15, I will have a BIK for the outstanding loan of £6K for which the company will charge me an interest @3.5% until the amount is repaid.

I can then repay the balance £6K in my next tax year (FY15-16), and if I pay this amount before July 15 (9 months and 1 day after the company’s tax year), no S455 tax is to be paid, otherwise I have to pay a S445 surcharge @25% of £6K which shall be returned back to me in the tax year following the repayment of the loan.

Apologies if I have not been clear, but I now seem to understand why 3.5% interested rate is better than taking a personal loan.

I'm going to say this again. There is no beneficial loan charge, interest or BIK on loans up to £10k.

The only issue you have is the s455 surcharge but this is recoverable once you've paid off the loan.

As Martin said, this is just a cash flow problem. If YourCo has the cash flow to pay the tax and wait until 9 months after the year in which you repay the loan to recover it then the cheapest option overall is to just keep making regular repayments and pay the s455 tax.

[TheFaQQer]

I don't understand why you think OP would pay any interest on their directors loan.

If the loan exceeds £10k at any stage in the year, then there would be interest to pay. If not, then there isn't. I was merely painting a worst-case scenario.

[TheCyclingProgrammer]

If the loan exceeds £10k at any stage in the year, then there would be interest to pay. If not, then there isn't. I was merely painting a worst-case scenario.

Fair enough, but I think you confused OP (or maybe they were confused already). It does seem like their intention is for the loan to keep going down, not up.

[coolguycp1]

Hi coolguycp

Let me get this right, you've taken a £10k loan from your company sometime this tax year and already repaid £4k via dividends therefore £6k is currently outstanding. YourCo year end is 31st October 2014.

Correct

As the loan has never exceeded £10k no interest needs to be charged and it's not a benefit in kind on you personally - just make sure nothing else accidentally took you over the £10k limit (overpaid salary/expenses etc.).

Thats good news. So, there is no BIK if the loan does not exceed £10K at any time till the repayment is completed, and I will ensure the outstanding loan is never over £10K.

Hi coolguycp

If you fully repay the loan by end July 2015 there will be no s455 charged so this gives you just under a year to clear the loan which hopefully would be possible? If not, you will pay s455 at 25% of the loan outstanding at the end of July.

Do you mean to say that the S455 surcharge shall be due for payment on end of July?

So if you are struggling to repay the loan to your company this would probably be advantageous over taking a personal loan to clear it because you are still going to have to make repayments on the personal loan and will end up paying interest to the loan provider which will cost you money. This obviously assumes your company cash flow is strong enough to cope with lending HMRC some money for a year or two.

I certainly agree with your final assessment that a personal loan would be a more expensive option than taking company loan.