Directors Loan - When to repay and what is acceptible

[northernladuk]

But if you know this is delaying you had to add the tax in when you take it out to get a full picture surely? As I said to delay to the point you have to withdraw it at the highest rate it blows the whole model?

[ASB]

As TCP said it's a delaying strategy. And your calculation does look about right.

In effect you can borrow your own money at 3% with no BIK. But you will have to front 32.5% of the value down the line. So there is an opportunity cost there (in reality probably close to nil).

I assume you are "maxed out" on dividends within the base rate band and you believe that at some point in the future, when you take the money for real, you will be able to get it within you basic rate band.

[dx4100]

Its good cheap short term finance for a big purchase. I bought a car and paid it off in a couple of months. Other than that not sure its going to help you any further.

[garnet]

As TCP said it's a delaying strategy. And your calculation does look about right.

In effect you can borrow your own money at 3% with no BIK. But you will have to front 32.5% of the value down the line. So there is an opportunity cost there (in reality probably close to nil).

I assume you are "maxed out" on dividends within the base rate band and you believe that at some point in the future, when you take the money for real, you will be able to get it within you basic rate band.

Yes, I am maxed out now and in future I will always be at basic rate.
The point was not to pay divi tax or bank interest.
I want to find the cheapest way to get money. 32.5% is not a problem when you take it back, so the effective cost is only CT on loan interest.

I am concerned about:

You don’t repay the loan within 9 months of the end of your Corporation Tax accounting period Use form CT600A when you prepare your Company Tax Return to show the amount owed at the end of the accounting period.

Pay 25% of the outstanding amount as Corporation Tax.

Interest on this Corporation Tax will be added until the Corporation Tax is paid or the loan is repaid.

You can reclaim the Corporation Tax - but not interest.

Anyone with other thoughts why this wont work?

[ASB]

I believe that what your highlighted bit is saying is that interest is payable on the corporation tax either from it's due date (as normal) or until the loan is repaid (repaying the loan will stop the interest clock in the event the CT hasn't actually be paid).

So, what you will, in effect, achieve is to save 32.5% on the a portion (possibly all) of the 20k when you actually draw those dividends in a future year when your normal dividend would be less, in effect bringing forward that revenue to this tax year.

You cost is simply the additional CT on the interest @ 3% you pay.

HMRC of course have a specific way they expect the interest to be calculated. It is somewhere on their website. They can also insist on a daily calculation.

https://www.gov.uk/hmrc-internal-man...anual/eim26313
https://www.gov.uk/hmrc-internal-man...anual/eim26245

[despot]

This is a great way to get a temporary loan without the hassle of talking to an irritating banker. For example, if you borrowed say £100k as a bridging loan on a house purchase and repaid the loan within 6 months, then you would only need to repay 6/12 of the 3% interest due on the £100k to avoid BIK. Eg the interest would be £1.5k. The interest payment is then taxed as company income at corporation tax rates. So the taxman gets 19% of the £1.5k interest payment, the remainder will stay in the company bank account. Eg actual cost of loan would be £295 being paid to the tax man. This is so convenient and simple and requires no paperwork as long as you keep a record of the loan and timing of payments.

If you make partial payments, it gets a bit more complicated and very expensive as a 25% CT premium on the outstanding amount sounds like a very heavy penalty. I have seen workarounds where the outstanding amount is paid back and then a new loan taken?! Probably best to get the advice of an accountant.

[northernladuk]

I have seen workarounds where the outstanding amount is paid back and then a new loan taken?! Probably best to get the advice of an accountant.

Which is called bed and breakfasting and there were new rules brought out around this to stop this. Something about a qualify time limit before you can take it again else the entire lot will be considered as income not a loan and taxed as such..

There is no probably about the accountant when you are buggering around with loans.

[TheCyclingProgrammer]

Something about a qualify time limit before you can take it again else the entire lot will be considered as income not a loan and taxed as such..

Only on loans up to £15k and the window is 30 days.

Over this amount and HMRC can deem any subsequent loan to be a continuation of a previous one but they would have to look at each case on its own merits. If it looks like you only re-paid the loan to avoid the CT charge then HMRC you could still be in trouble.

Also the cost of the loan isn't just the corporation tax on the interest paid to YourCo, its also the personal income tax you need to pay to get that money back out again. So if you pay £1500 in interest, CT (at 20%, not sure why the previous poster thinks its 19%) of £300 then to get that £1200 out as a dividend over and above what you'd usually pay yourself you're looking at at least 7.5% but more likely higher rate tax of 32.5% (assuming you've already taken dividends up to the threshold) which is £390 bringing the total cost of the loan to £690.

Annualised that is still only a 0.01% interest rate so still cheap.

[despot]

Which is called bed and breakfasting and there were new rules brought out around this to stop this. Something about a qualify time limit before you can take it again else the entire lot will be considered as income not a loan and taxed as such..

There is no probably about the accountant when you are buggering around with loans.

I must have missed that little loophole been tightened! So best case would be to get a 9 month or so cheap loan and then repay the lot or ask a good accountant as they can perform quite a few neat tricks that would knock any logical thinking person into the rough in seconds.

[northernladuk]

I must have missed that little loophole been tightened! So best case would be to get a 9 month or so cheap loan and then repay the lot or ask a good accountant as they can perform quite a few neat tricks that would knock any logical thinking person into the rough in seconds.

9 month??