Director's loan + Offset mortgage = low interest?

[Ravello]

With that LTV, plenty of offsets in 3% to 4% range.

So not sure what you would gain by lending at 4.75%, even ignoring the corp tax due on the payments?

That's the bit I've been struggling with! I'm not sure that the OP will actually gain anything from his proposal. The only thing I'm thinking is that obviously the £4,750p.a. interest, minus 21% corp tax (so roughly £3,750) could then be reclaimed by the director in the form of divis or salary.

This would therefore make the effective interest 1% (based upon paying £1k which could not be reclaimed). This doesn't however take into account personal taxation on any subsequent salary/divis.

It could be feasible but I'm not sure the gains will be as much as 2 or 3% as the OP is hoping for...

[Olly]

That's eeeeeexactly it....
I'm either going to close my company and pay 10% entrepreneurs relief or whatever it is. So total tax is 31% (not 21%) or I'm leaving it in company and doing little tricks and wheezes like this one until such a time comes that I'm no longer topping up the company (by working for it) and instead drain its assets as divs and salary in my retirement.

Option A is marginally more likely
or even moving somewhere tax free(ish)

Whatever way you crunch the numbers I think this works out saving money long term. Although not much if offsets really are as low as 3 or 4%

[ASB]

That's eeeeeexactly it....
I'm either going to close my company and pay 10% entrepreneurs relief or whatever it is. So total tax is 31% (not 21%) or I'm leaving it in company and doing little tricks and wheezes like this one until such a time comes that I'm no longer topping up the company (by working for it) and instead drain its assets as divs and salary in my retirement.

Option A is marginally more likely
or even moving somewhere tax free(ish)

Whatever way you crunch the numbers I think this works out saving money long term. Although not much if offsets really are as low as 3 or 4%

Loans to directors generally attract a corporation tax charge on the principal (25% I think) if the loan is outstanding 9 months after the end of year. This can be reclaimed when the loan is finally repaid.

However, it may be the case that you can repay the loan then take a new one....

[Ravello]

However, it may be the case that you can repay the loan then take a new one....

IANAA but yep, that's how I understand it, and you can literally repay the loan the day before the deadline and take out the next the day after...

[jmo21]

Alternatively if you mean the mortgage, then the whole idea of an offset is that you can repay any or all of it as and when you feel like it without penalty.

the whole idea???

No it's not.

The "whole idea" of an offset mortgage is that any savings you have offset the value of the mortgage before the interest on the mortgage is calculated.

My offset mortgage does have a penalty clause if repaid in full in a certain time frame.

[ASB]

My offset mortgage does have a penalty clause if repaid in full in a certain time frame.

Yeah, I've still got a northern rock mortgage with 50 quid on it because if I pay it off before the orginal date I'll have to repay 750 quid incentive and I think 250 quid closing fee. Leaving 50 quid on it for the next few years and I don't need to pay either.

[philip@wellwoodhoyle]

IANAA but yep, that's how I understand it, and you can literally repay the loan the day before the deadline and take out the next the day after...

HMRC aren't daft...

http://www.hmrc.gov.uk/manuals/ctmanual/CTM61615.htm

http://www.hmrc.gov.uk/manuals/emmanual/em8565.htm

HMRC regard this as "bed and breakfasting" and mention penalties for those found out!

[Olly]

hmmm...seems I can still do it a bit but not taking the piss for prolonged periods....I was going to moan that taxes laws are so "grey" but in this case they'd have me pretty much banged to rights as "extracting funds from the company in the guise of loans rather than as remuneration or dividends" is exactly the intention.

"extracting" is a strong word though....it's just a loan.....darn it they spoil all my fun

[ASB]

hmmm...seems I can still do it a bit but not taking the piss for prolonged periods....I was going to moan that taxes laws are so "grey" but in this case they'd have me pretty much banged to rights as "extracting funds from the company in the guise of loans rather than as remuneration or dividends" is exactly the intention.

"extracting" is a strong word though....it's just a loan.....darn it they spoil all my fun

It depends how agressive you feel. But if you were to repay a loan of say 100k - and importantly ensure the transaction actually happens - not just a book transaction - then a few months later take a loan for 40k and some time after that another loan for perhaps another 40k then HMRC might not regard that as falling foul of the rules - though you would be much more likely to be secure if the first loan had been used on the offset and the second and thrid loans were, say, to buy a couple of cars. If you put the money to the same use then they have a strong reason to argue it's really the same loan.

[philip@wellwoodhoyle]

Considering that you have to repay the loan 9 months after the year end to avoid the 25% tax, you're only 3 months from the next financial year. Perhaps you should take a loan again on the first day of the new financial year, so that year 1 you take the loan, year 2 pay it back, year 3 take another loan, year 4 pay it back. That way, there is a clear 3 month period between paying it back and taking it again, but more importantly, it all falls into different tax years. I'm not saying doing it this way would make it work for you, and I'm certainly not saying HMRC wouldn't pursue it for penalties etc but if you're going to do it anyway, that kind of plan would reduce your risks. CT tax inspectors look at each year in isolation and they're the ones checking for the 25% income tax charge and PAYE inspectors are looking over several years but will be more interested in the beneficial loan interest (irrelevant as you're paying interest anyway). As mentioned above though, probably wise to use the funds for different purposes rather than just paying into your offset mortgage and then drawing it out again, repeatedly year after year - how about paying offset mortgage in year 1 repayment year 2, deposit for new home year 3, pay off year 4, etc?