Best way to calculate interest on Directors Loan accounts over £10k

[css_jay99]

With my current 3.24 variable rate mortgage about to change, I am thinking It might be a good idea to pay off my mortgage using ltd co. funds at 2% HMRC official interest rate. Everything I have considered indicated this might be the best option which will not result in early repayment charges or mortgage fee on a mortgage I could potentially be rid off under 2yrs. I'm hopping to repay in full within 9 months of year end so S455 is not triggered.

Apart from having to declare the loan in CT600, I am hoping I have not left any other HMRC requirements out. Also what's the best way of calculating (and recording) interest on the account (monthly/daily?) . Any decent spreadsheet out there or just use a mortgage calculator spreadsheet?

Thanks

[ladymuck]

I would calculate the interest daily but only do a monthly journal in the books.

A 'loan amortisation' spreadsheet is likely to be the best method to both do the calculation and keep track of repayments you make.

Check if the interest is supposed to be simple or compound. Makes a biiiiig difference.

What's your back up plan if you can't repay within 9 months? You might think it won't happen but still a good idea to plan for it.

[northernladuk]

Surely this is one for your accountants to do the sums for you and also advise you on the proper process to take it? Not something you want to be doing off the advice from your peers.

You'll have to keep a close eye on it for this to be beneficial over such a short term with such low interest rates. Personally I wouldn't be buggering about with company money for those amounts. The fall out of it going wrong is way way bigger. Risk vs reward just not worth it.

As usual in these types of threads you've omitted key facts like the amount so we can help or give our opinion. Might not matter, but it might.

[css_jay99]

I would calculate the interest daily but only do a monthly journal in the books.

A 'loan amortisation' spreadsheet is likely to be the best method to both do the calculation and keep track of repayments you make.

Check if the interest is supposed to be simple or compound. Makes a biiiiig difference.

What's your back up plan if you can't repay within 9 months? You might think it won't happen but still a good idea to plan for it.

I'll check with hmrc & accountant regarding the calculations. Its repayment over part of current accounting year + 9 months after which gives me about 14 months to pay up. I'm confident that it will be paid in time but off course there will be a backup plan.

Surely this is one for your accountants to do the sums for you and also advise you on the proper process to take it? Not something you want to be doing off the advice from your peers.

You'll have to keep a close eye on it for this to be beneficial over such a short term with such low interest rates. Personally I wouldn't be buggering about with company money for those amounts. The fall out of it going wrong is way way bigger. Risk vs reward just not worth it.

As usual in these types of threads you've omitted key facts like the amount so we can help or give our opinion. Might not matter, but it might.

I'm ghosting them at the moment till I submit trial balances for tax return. It's about £35k. While the difference in rates/savings might not be big, It's still something nonetheless. Most importantly, I can use funds in personal account for other things before re focusing back to clearing the loan with interest rate rises over the next year furthest from my mind.

Surely this type of infrequent short term borrowings (over £10k) is a good way of making use of company money at a decent cost ... Saying that business rates bonds have picked up.

[northernladuk]

Surely this type of infrequent short term borrowings (over £10k) is a good way of making use of company money at a decent cost ... Saying that business rates bonds have picked up.

But the cost of it going wrong far exceeds the few percent you'll save. And it does go wrong regularly. It's the stuff you don't know that could happen that is the problem. Here is an example and there plenty more on here.
https://forums.contractoruk.com/acco...loan-help.html

All the advice I've seen from the respected accountants on here and others that don't post is to not bugger about with it if possible. We've had plenty of people coming on here that have cocked it up and bitterly regretted it. It's somewhat similar to company cars. You can do it but the general rule of thing is just don't bother (EV has changed that now of course)

I'd speak to your accountant first ot make sure you've got the process right first as you might be missing something pretty important. You need a resolution from the shareholders so there is some extra paperwork etc. Don't mess about with 35k that could end up incurring over 20% interest if you screw it up on advice from other contractors. Get proper advice.

Lots of short term borrowings can also fall foul of bed and breakfasting rules and HMRC will deem it income if you don't do it properly on top of all the interest stuff.

The savings just aren't worth the risk or hassle IMO. You company and you are two separate things and keep them that way. Getting in to the habit of using your company as a cash mule will more often than not cost you more in the long run. We are talking the difference between a 4% mortgage and 2% interest rate on 35k for 19 months? Is that even a grand saved?

But.. if you've read all my negativity and you've gone in with a greater awareness of the risks and happy to take them on then fill your boots. But for gods sake speak to your accountant.

[northernladuk]

Oh, and don't forget the DL is a very useful tool for staying tax efficient. If you need to take more dividends one year or you make an accounting mistake you can take some from the DL to keep the divis under the threshold and then pay it back next year so saving on the tax. With a loan already out you'll potentially lose this ability which could mean you'll be paying extra tax which could easily beat the 1k you'll be saving from your scheme. To be honest I don't know the exact details but bear that point in mind and ask your accountant how it might affect your exact situation.

[northernladuk]

Oh and.. (sorry it's late and my brain is befuddled). Isn't the interest charged tax as it's income to the company? So you are looking at a saving of 2% vs mortgage rate minus the extra tax on the interest so further reducing the benefit?

[ladymuck]

Oh and.. (sorry it's late and my brain is befuddled). Isn't the interest charged tax as it's income to the company? So you are looking at a saving of 2% vs mortgage rate minus the extra tax on the interest so further reducing the benefit?

The interest you pay on the loan is income to the company, yes. So there'll be CT to pay on it.

[css_jay99]

But the cost of it going wrong far exceeds the few percent you'll save. And it does go wrong regularly. It's the stuff you don't know that could happen that is the problem. Here is an example and there plenty more on here.
https://forums.contractoruk.com/acco...loan-help.html

All the advice I've seen from the respected accountants on here and others that don't post is to not bugger about with it if possible. We've had plenty of people coming on here that have cocked it up and bitterly regretted it. It's somewhat similar to company cars. You can do it but the general rule of thing is just don't bother (EV has changed that now of course)

I'd speak to your accountant first ot make sure you've got the process right first as you might be missing something pretty important. You need a resolution from the shareholders so there is some extra paperwork etc. Don't mess about with 35k that could end up incurring over 20% interest if you screw it up on advice from other contractors. Get proper advice.

Lots of short term borrowings can also fall foul of bed and breakfasting rules and HMRC will deem it income if you don't do it properly on top of all the interest stuff.

The savings just aren't worth the risk or hassle IMO. You company and you are two separate things and keep them that way. Getting in to the habit of using your company as a cash mule will more often than not cost you more in the long run. We are talking the difference between a 4% mortgage and 2% interest rate on 35k for 19 months? Is that even a grand saved?

But.. if you've read all my negativity and you've gone in with a greater awareness of the risks and happy to take them on then fill your boots. But for gods sake speak to your accountant.

I hear you but my scenario is completely different from the linked thread. I haven't taken a directors loan in a decade and divs only ever come out once a year so no chance of bank statements aiding misinterpretation from hmrc if harrased. As you said, I will create all the necessary paperwork.

Oh and.. (sorry it's late and my brain is befuddled). Isn't the interest charged tax as it's income to the company? So you are looking at a saving of 2% vs mortgage rate minus the extra tax on the interest so further reducing the benefit?

The benefit is weighted more towards flexibility rather than savings. Also the interest charged on this transaction alone more than covers my only outgoings i.e. accountant & ipse fees .... though the latter is not tax deductible


Also this discussions has made me think about delaying this decision a bit longer just incase I can wipe more than half of the balance after daughter starts uni in September. I haven't got a clue what her outgoings will be like

[northernladuk]

Even better. The interest charged on this transaction alone more than covers my only outgoings i.e. accountant & ipse fees .... though the latter is not tax deductible

Eh? But it comes out of your pocket? It's you paying the interest so doesn't really 'cover' anything surely?