Directors Loan WITH interest for home improvement

[TechJinx]

Hi all,

Done a bit of looking around the forum and I know there are many questions around interest free directors loans but I was wondering about the interest bearing option which I couldn't really find much about.

I will be doing some work on my house in the next year or so and will need £20-30k. Only moved in less than a year ago so I can't add this to the mortgage and I was wondering why I wouldn't go down the route of a loan from my Ltd at commercial rates which are at roughly the best you can do for a personal loan on the open market.

From what I can tell if I use the HMRC rate it wouldn't count as a benefit in Kind and If I'm repaying interest at least I'm doing it back into my Ltd company rather than to a third party.

The assumptions I am using here are

1. Interest bearing loan does not attract benefit in kind
2. The interest bearing option does not need to be paid off within 9 months of the end of the companies year. (this is the part I'm having trouble pinning down)
3. The loan and the interest would be repaid back into the companies coffers, meaning my ltd would be making the "profit" on the loan.
4. I can access the funds from my warchest to do my home improvement without needing to secure any extra borrowing on the house or add anything to my credit file.

Any help appreciated - as I said I tried a search but it was all questions about the interest free version.

Ta.

[Kenny@MyAccountantFriend]

Hi,

In response to your points in turn

1) Correct as long as the interest paid is per HMRC rates https://www.gov.uk/government/public...official-rates

2) The company is liable to S455 taxes on the value of the loan set at 25%, this will be repayable to your company following the loan being repaid and in most cases offset against your CT liability following the year of repayment. (9 months after the year in date for which the loan was repaid)

3) Correct, you pay CT on the profit remaining 80% available to be drawn as income.

4) Correct

The downside is therefore the S455 taxes that would be payable, however if the company has the funds this will become repayable to you.

[TechJinx]

Hi,

In response to your points in turn

1) Correct as long as the interest paid is per HMRC rates https://www.gov.uk/government/public...official-rates

2) The company is liable to S455 taxes on the value of the loan set at 25%, this will be repayable to your company following the loan being repaid and in most cases offset against your CT liability following the year of repayment. (9 months after the year in date for which the loan was repaid)

3) Correct, you pay CT on the profit remaining 80% available to be drawn as income.

4) Correct

The downside is therefore the S455 taxes that would be payable, however if the company has the funds this will become repayable to you.

ok thanks for the quick reply

On point 2 - does this mean the loan can be over any period and the company is repaid the tax once the loan is repaid? Does the company pay the tax once - in the year the loan is paid out? I.E provided the loan is eventually repaid the net cost to the company is zero regardless of the length of the loan?

On point 1 - can you fix the loan at current rates or does it have to be a variable loan always linked to the HMRC rate to not attract BIK?

[Kenny@MyAccountantFriend]

The company is repaid the tax 9 months after the company year in which the loan is repaid (the same day the CT would be payable). The loan can be for any period of time and the S455 tax will only be charged for the year in which the loan is made.

The net effect on the company is the profit from the interest but the loan itself will not have cost anything overall for the company.

The interest could be higher than the HMRC rate but I would recommend sticking to their rates and they do not change very often at present, if you pay less than their rate you have a BIK applied to the difference.

[TechJinx]

Great - thanks for the help!

I'm surprised more people don't do this then - if you have a decent sized warchest its a really good way to get instant, competitive rate finance!

[Kenny@MyAccountantFriend]

You're welcome.

Not all have the funds available to pay the loan out and also the S455 tax to HMRC at the same time, as well as cover their normal tax liabilities for the company.

[northernladuk]

Great - thanks for the help!

I'm surprised more people don't do this then - if you have a decent sized warchest its a really good way to get instant, competitive rate finance!

Most won't be in the first year of a mortgage and need to do this and also I would bet many shut the company down at any opportunity before the warchest get's that large to make use of any tax breaks although this is a bit of a grey area.

I would also think many other people use it as a warchest and not as savings to dip in and out of. What happens if you injure yourself for 6 months while doing the house up? Paying the loan back still viable?

And you would be paying the loan back using the money you divi'd out to yourself so available cash will drop dramatically over the period you loan it as well.

[TheCyclingProgrammer]

I'm surprised more people don't do this then - if you have a decent sized warchest its a really good way to get instant, competitive rate finance!

Its mainly down to cashflow - needing a decent sized warchest to not just cover the loan by the s455 tax for the duration of the loan too. But you're right, IF your company has the funds available, its probably the best way to get cheap finance.

[IRMe]

One thing I've wondered about with regard to the 9 month limit and S455, if someone is a director of multiple separate limited companies then what is to prevent them from bouncing between loans from the two (or more) of them in order to avoid the 25% 'down payment'? For example Ltd A loans £20k up until 8months post year end, this is then paid back by the director using a loan from Ltd B and kept for similar period - rinse and repeat. I'm sure there must be some regulation against this but no idea what, no doubt it would also raise your profile with HMRC.

[northernladuk]

One thing I've wondered about with regard to the 9 month limit and S455, if someone is a director of multiple separate limited companies then what is to prevent them from bouncing between loans from the two (or more) of them in order to avoid the 25% 'down payment'? For example Ltd A loans £20k up until 8months post year end, this is then paid back by the director using a loan from Ltd B and kept for similar period - rinse and repeat. I'm sure there must be some regulation against this but no idea what, no doubt it would also raise your profile with HMRC.

You mean like this?

Lewis Silkin - Journal - Loans to participators in a close company

Recent amendments to the legislation – anti-avoidance

New legislation was introduced in the Finance Act 2013 to stop companies making new loans to participators to enable them to repay the original loans before the 25% was due. Now, if a new loan is made within 30 days (whether before or after) of the repayment of an old loan, the repayment is matched first with the new loan. The old loan continues to exist and the loans to participators rules will apply.

Or bed and breakfast loans

Director

Intentions and arrangements rule

Where a participator owes at least £15,000 to a company, a full or partial repayment is made and at the time there are arrangements or an intention to take out a new loan at any time in the future then the 25% tax charge is restricted in the same way as it is for the 30-day rule. For example, if a participator has a loan of £85,000 and a repayment of £80,000 is made shortly after the year-end then previously a 25% tax charge would be applied to the remaining balance of £50,000.

However, if at the time of the repayment the participator knew that they would require a further loan from the company of £70,000, say within three months of repaying the original loan then under the new rules, a 25% tax charge will become due on the balance of £75,000.

These provisions do not apply where the repayment itself gives rise to a charge to income tax, so where a dividend or salary/bonus has been used to repay the loan balance then these rules do not apply.

Don't start buggering around with this IMO...