Loan vs dividends

[oliverson]

Couldn't find exactly what I was looking for in the forums so don't shoot me down if I missed it.

I have a number of home improvements that need undertaking on my two properties. I was planning on funding these by payment of dividends, but there are two downsides:

1. 8.75% interest on dividends (basic rate)
2. 33.75% higher rate tax would be breached

So I got to thinking, wouldn't it be a smarter move to draw up a commercial/beneficial loan from my Ltd company to myself, giving:

1. A much lower rate, think it's around 2.5% currently
2. A longer payment schedule
3. The ability to take more dividends for 'other purposes'

Also, would the loan to me, lower the company's Corporation Tax liability?

Seems like a no-brainer here. What am I missing?

Thanks

[Maslins]

It's something most accountants recommend against, many clients will decide to dabble with it anyway, and a decent chunk of them will get into a mess and regret it.

To answer some of your points:
- no, your company lending money to you will not lower the corporation tax liability. Indeed it will likely do the opposite. Two reasons:
1) you'll pay the company interest on the loan. This interest is extra taxable income for the company.
2) if you don't repay the loan within 9 months of your year end, there'll be an extra "S.455" liability for the company to pay, being 33.75% of the loan not repaid.

In the very short term, loans are great:
- you get a load of cash,
- it's not income,
- hence not taxable.

...but it's a loan. Like any loan, it has to be repaid. Typically that just happens by reversing the above. Ie:
- you don't get any more cash,
- you declare dividends to clear the loan,
- hence are taxed despite not getting any more money.

The only time it might make sense is if your personal earnings are high this year, and you expect them to be significantly lower next year. Then, yes, it may make sense for you to borrow funds now (when earnings high), to then clear it next year by declaring dividends (when income is otherwise lower).

[oliverson]

It's something most accountants recommend against, many clients will decide to dabble with it anyway, and a decent chunk of them will get into a mess and regret it.

To answer some of your points:
- no, your company lending money to you will not lower the corporation tax liability. Indeed it will likely do the opposite. Two reasons:
1) you'll pay the company interest on the loan. This interest is extra taxable income for the company.
2) if you don't repay the loan within 9 months of your year end, there'll be an extra "S.455" liability for the company to pay, being 33.75% of the loan not repaid.

In the very short term, loans are great:
- you get a load of cash,
- it's not income,
- hence not taxable.

...but it's a loan. Like any loan, it has to be repaid. Typically that just happens by reversing the above. Ie:
- you don't get any more cash,
- you declare dividends to clear the loan,
- hence are taxed despite not getting any more money.

The only time it might make sense is if your personal earnings are high this year, and you expect them to be significantly lower next year. Then, yes, it may make sense for you to borrow funds now (when earnings high), to then clear it next year by declaring dividends (when income is otherwise lower).

Thanks for this. I didn't realise this kind of loan had to be paid off within 9 months of year end. I thought that only applied to loans less than £ 10k that didn't have interest applied to them.

[GregRickshaw]

I think you can have around £10k 'directors loan' though can't you before the 9 months rule and interest apply?

I will however, obviously tip my hat to the poster before Maslins as they know this stuff at least 1000 times better than I do.

[Maslins]

Two separate things:

- interest - this does have the £10k threshold. Loans below that, no interest needs to be paid. Loans above that you need to pay your company interest, or suffer a taxable benefit in kind on the interest you should've paid. This applies regardless of how long the loan was for (though in practice if it was only a few days it'll probably be ignored for pragmatic reasons).

- S.455 - there's no de minimis for this in terms of amount (though as above, for pragmatic reasons a long term £1 loan would likely be ignored). If you take a loan, and don't repay it by your company's year end, it needs declaring on the CT return. If it's still not repaid by 9 months after the year end, additional tax is due based on the amount not cleared.

IE big long term loans suffer both. Small long term loans suffer S.455 only. Big short term loans suffer interest only. Small short term loans suffer neither.

[Lance]

I have recently taken a large chunk of cash as DLA to offset my mortgage. That will be paid back 8 months after year end. And taken out again 6 weeks later. I don't need to leave such a large gap, but I don't want to leave it to the last minute and find that limits/secuiryt/other gets in the way. If done a few weeks in advance then no sweating about it.

[JustKeepSwimming]

Doesn't the loan interest rate need to be a commercial rate? 2.5% was a commercial rate 2 years ago, no chance it still is.

[Lance]

Doesn't the loan interest rate need to be a commercial rate? 2.5% was a commercial rate 2 years ago, no chance it still is.

I believe it has to be at least the same as the base rate. I'll let my accountant worry about it. Still better off as profit in my CO than profit in a bank

[Andy Hallett]

HMRC beneficial Rates are here https://www.gov.uk/government/public...official-rates

[Lance]

HMRC beneficial Rates are here https://www.gov.uk/government/public...official-rates

but that's in the past. So what will it be for this year??? I'd guess 6%, but plan on base rate as the minimum.