Director's loan + Offset mortgage = low interest?

[Olly]

Good point about the 3 months...think I'll do that + each year the loan from my Ltd will be lower as I pay off capital in the mortgage.

Didn't quite understand what you meant by taking the loan for different purposes each year.

[philip@wellwoodhoyle]

Didn't quite understand what you meant by taking the loan for different purposes each year.

To demonstrate that it isn't the same loan. If all you're doing is transferring the money in and out of your offset, HMRC could well have an argument that you're never really paying off the loan, you're just "bed & breakfasting" it - if however you use the loan for different purposes, it would be very hard for them to argue it's the same loan.

[minstrel]

I raised this subject last week here.

The BIK problem used to outweigh the gain but I think with the change in interest rates it's worthwhile doing the loan. Checked with 2 accountants and they both agreed.

We've all had it drummed into us that director loans over £5,000 are a bad idea and there's no way you can just transfer money from your company account to your offset mortgage and save on interest payments.

A couple of things have happened in recent months which I think may have changed the situation:

1. The HMRC official rates of interest dropped from 6.25% to 4.75% on 01/03/09
2. The rate of interest that most banks are giving for deposit accounts is dropping close to zero

If you are stuck on a fixed rate offset mortgage, you are probably getting tired of all your friends on trackers telling you how much money they are saving each month. I think there is a way to save a bit on interest payments.

Here's my logic, see what you think. I'm assuming a fixed rate offset mortgage of 4.99% and 0% interest on company funds.

So, if my company gave me a loan of £10,000 as long as I paid 4.75% interest then no BIK would arise.

I loan £10,000 and pay £499 less on my mortgage. I have to pay company £475 to avoid BIK which I do. I'm personally £24 (0.24%) better off, plus my company has £475 which after CT becomes £375 which could be distributed as dividends.

I'm up £24 + £375 = £399 i.e. 3.99%.

In other words I'm getting an effective rate of interest of 3.99% after tax by investing company funds in offset mortgage.

Can someone now please point out to me what I've missed? I'm sure there must be a catch as this sounds too good to be true.

[minstrel]

To demonstrate that it isn't the same loan. If all you're doing is transferring the money in and out of your offset, HMRC could well have an argument that you're never really paying off the loan, you're just "bed & breakfasting" it - if however you use the loan for different purposes, it would be very hard for them to argue it's the same loan.

But isn't the S419 25% tax charge paid back to company by HMRC when loan is repaid to company?

So even if they argued you should have paid the tax you'll get it refunded eventually as long as the loan is repaid.

I haven't done the sums but I would have thought even if you paid the tax charge you'd be quids in if you have a stack of cash in the company.

[Olly]

one thing neither of us have included is the lost interest on your company account...
I think I currently get bugger all (or very very close to) interest at Cater Allen so it won't make much of a difference.

Was thinking along the lines of 100K mortgage and between 75 and 100K loan from my Ltd offset against it.

[ASB]

But isn't the S419 25% tax charge paid back to company by HMRC when loan is repaid to company?

So even if they argued you should have paid the tax you'll get it refunded eventually as long as the loan is repaid.

I haven't done the sums but I would have thought even if you paid the tax charge you'd be quids in if you have a stack of cash in the company.

That true. But I think the problem might be that if the sucessfully argue you should have paid the tax but hadn't then there are issues with penalties and interest. Further I don't think it's quite as simple as getting the tax back (though it might be). It may well be the case that the CT rebate is in fact a credit which can only be offset against other CT payable (though I don't know this).

[minstrel]

That true. But I think the problem might be that if the sucessfully argue you should have paid the tax but hadn't then there are issues with penalties and interest. Further I don't think it's quite as simple as getting the tax back (though it might be). It may well be the case that the CT rebate is in fact a credit which can only be offset against other CT payable (though I don't know this).

Maybe best to be squeaky clean then and pay the CT.

Say you had £100k spare in the company and you could get an effective interest rate of 4% by loaning it to director.

If you made a director loan of £80k and paid the £20k CT, you'd still be getting an effective rate of maybe 3% interest on the £100k. The £20k CT could be claimed back when loan is repaid according to HMRC.

I think the beneficial conditions only apply now because savings interest rates are so low relative to mortgages (especially fixed rates already agreed) and the HMRC BIK interest rate is so low at 4.75%.

Hopefully, within a year or two interest rates will be back up and people on fixed rate mortgages will be able to move to better rates. At the moment I can't see a downside when comparing it to leaving cash in the company earning 0%.

[Ravello]

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.

Apologies for my phraseology, my post was directed at a specific comment.

However, the utility of an offset mortgage essentially allows repayment in full without penalty, since if you offset the full amount you are not being charged any interest, ergo you have effectively 'paid off' the mortgage, as you could subsequently debit the offset funds monthly to meet the actual payment without any further charge.

For the record, the conditions for physically paying back the capital loan (as opposed to offsetting the full amount) vary from lender to lender. My particular lender does not impose any penalties should I choose to pay back the loan as opposed to offsetting the balance.

[Little'Old Me]

That true. But I think the problem might be that if the sucessfully argue you should have paid the tax but hadn't then there are issues with penalties and interest. Further I don't think it's quite as simple as getting the tax back (though it might be). It may well be the case that the CT rebate is in fact a credit which can only be offset against other CT payable (though I don't know this).

The 25% is an additional Tax to CT held on account until the Loan is paid off. Partial repayment is made, if part of the loan is repaid.

As an accountant who has to complete the forms and work out the loan amount outstanding according to the HMRC rules, I have had a few client decide not to bother. I am happy do it it, but the company accounts and directors loan information has to be up to date when its done. No changes, due to something missed, or forgotten. So it is not that easy to do it "in a timely fashion". I find I may have to redo the figures several times, as I have to keep going back to discuss the implications. This means I charge more. Accountants fees are charged to do the figures before hand to work out the benefits, but clients never get it right - so more fees to do it again, and sometimes again until everything has been included, that can be.

Now I suggest as an option, if your company has the "profits", just take a huge dividend just after 6 April. Whatever takes you into the Higher rate - will cost you and additional 22.5% So an extra 100k taken at the end of April 2009 will mean a tax bill of £22,500, but you don't have to pay the tax bill until 31 Jan 2011! That nearly 2 years later. There is nothing to stop you from using the £22.5k against your mortgage until you have to pay it. And the best thing about all this - the £77,500 is your for ever, you don't have to pay it back.

[Little'Old Me]

Maybe best to be squeaky clean then and pay the CT.

Say you had £100k spare in the company and you could get an effective interest rate of 4% by loaning it to director.

If you made a director loan of £80k and paid the £20k CT, you'd still be getting an effective rate of maybe 3% interest on the £100k. The £20k CT could be claimed back when loan is repaid according to HMRC.

I think the beneficial conditions only apply now because savings interest rates are so low relative to mortgages (especially fixed rates already agreed) and the HMRC BIK interest rate is so low at 4.75%.

Hopefully, within a year or two interest rates will be back up and people on fixed rate mortgages will be able to move to better rates. At the moment I can't see a downside when comparing it to leaving cash in the company earning 0%.

There is a flaw here. If you took £80k and paid £20k (25% of 80K) tax on account you would only have £80k not £100k to use. Unless you repaid the 20k yourself to pay the tax bill, and then it works. If you also took the 20K, and did not repay it to the company then the directors loan would be £100k and the tax on account would then be £25k.

I have a client who was supposed to do this, but when the time came, there was enough money in the company to pay the money on account, so he did not repay his directors loan, and ended up paying extra tax! I had change my paperwork as what we agreed was not what happened.