Saving/Retirement etc

[northernladuk]

If you are a bit short of work ASB you can come round and do my lawn!!

[psychocandy]

Yes, but paying down debt may not be the best option if obtaining the funds to pay the debt down causes extra taxation.

Lets assume:-

- you have 320k in the company
- your annual living costs (excluding mortgage) are 20k
- your mortgage has 140k principal

So, you pay 200k as a divi in one go. The company now 120k.

You get 43k with no tax to pay, 157k with 25% to pay = 118k + 43k = 161k.

You spend 20k on day to day, pay 140k redeeming the mortgage and are left over with 1k.

Years 2-7 you pay yourself 20k per year and use that on your day to day living. The company then has no money.


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Now try my scenario. The company puts enough of its funds on deposit to offset the mortgage interest.

Year 1. Draw 43k.

20k living, 23k off mortgage = 117k. Company has 277k left.

Company puts enough on deposit annulling your mortgage interest. Company puts balance on deposit elsewhere and makes a few quid.

Year 2. Draw 43k.

20k living, 23k off mortgage = 94k. Company has 234k left.

Year 3. Draw 43k.

20k living, 23k off mortgage = 71k. Company has 191k left.

Year 4. Draw 43k.

20k living, 23k off mortgage = 48k. Company has 148k left.

Year 5. Draw 43k.

20k living, 23k off mortgage = 25k. Company has 105k left.

Year 6. Draw 43k.

20k living, 23k off mortgage = 2k. Company has 62k left.

Year 7. Draw 22k.

20k living, 2k off mortgage = 0k. Company has 40k left.

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So, under my scenario its 40k better. Which obviously is the amount of higher rate tax that was paid on the large dividend to give the feel good factor of paying the mortgage off sooner.

Whilst I would entirely agree that paying down debt is generally good it is necessary to consider the additional costs that may be involved as a result of doing so (in this case tax).

The scenario above obviously depends upon a number of things:-

- The amount one actually needs to live on. If one can live on < 43k then there is scope to defer paying down debt.
- If it is not possible to offset without attracting BIK then these costs have to be factored in, since that is paying interest.

Couple of things.

1) In example 1, it'd cost you a shedload more than 25% in tax if you declared a 200K dividend.

2) In example 1, mortgage is paid off, gone, no more interest charged, no more monthly payments. In example 2, you've still paying interest on the outstanding balance and still have to make monthly payments to mortgage. Admittedly, it goes down over the 7 years. Dont understand this annulling interest thing? It might cover the interest payments but its still charged whereas in (1) its not.

Or are you talking about moving the whole amount into mortgage offset account somehow to totally negate the balance? And, 'leave' £23K each year.

Surely this is, in effect, taking a £200K Directors Loan and, as such, a huge BIK?

Not sure what the rate your company needs to charge you to make it a non-BIK loan? Can you do this?

[northernladuk]

Couple of things.

1) In example 1, it'd cost you a shedload more than 25% in tax if you declared a 200K dividend.

2) In example 1, mortgage is paid off, gone, no more interest charged, no more monthly payments. In example 2, you've still paying interest on the outstanding balance and still have to make monthly payments to mortgage. Admittedly, it goes down over the 7 years. Dont understand this annulling interest thing? It might cover the interest payments but its still charged whereas in (1) its not.

Or are you talking about moving the whole amount into mortgage offset account somehow to totally negate the balance? And, 'leave' £23K each year.

Surely this is, in effect, taking a £200K Directors Loan and, as such, a huge BIK?

Not sure what the rate your company needs to charge you to make it a non-BIK loan? Can you do this?

Do you have 200k in your company and are looking at this as a viable solution or just looking out of interest? I thought you had only just come back to contracting.

[ASB]

If you are a bit short of work ASB you can come round and do my lawn!!

Water it with red wine. That way it'll grow half cut......

[northernladuk]

Water it with red wine. That way it'll grow half cut......

Muahahahahahahahaha... hahahahahah.. hahahaha.. hahaa.. ha .. ha..

[ASB]

Couple of things.

1) In example 1, it'd cost you a shedload more than 25% in tax if you declared a 200K dividend.

Yes you are right. I had forgotten that the 40% band is limited now.

2) In example 1, mortgage is paid off, gone, no more interest charged, no more monthly payments. In example 2, you've still paying interest on the outstanding balance and still have to make monthly payments to mortgage. Admittedly, it goes down over the 7 years. Dont understand this annulling interest thing? It might cover the interest payments but its still charged whereas in (1) its not.

No you're not. That's the whole point. Offset mortgage x, cash in an offset account x, net interest payable = zero. So in example 2 the mortgage is still paid off after 7 years. The total paid to the mortgage is the same (140k). The difference is that the individual hasn't had to pay any 40% (or greater) tax along the way.

Or are you talking about moving the whole amount into mortgage offset account somehow to totally negate the balance? And, 'leave' £23K each year.

Yes, keep the company money in an account which is offset against the mortgage. The mortgage payments are made by the recipient of the dividend.

Surely this is, in effect, taking a £200K Directors Loan and, as such, a huge BIK?

Not sure what the rate your company needs to charge you to make it a non-BIK loan? Can you do this?

If it were a directors loan then there would be BIK Based on nominal interest (unless adequate interest were paid). There would also be S419 tax involved. Even so it is possible that could still be cost effective but there is no way I'm going to bother working out those numbers.

This sub-discussion in fact started from my earlier comment to css_jay of:-

"One mortgage idea is to place the company funds on deposit (in trust for the company) into an account which is offset against the mortgage. You don't pay mortgage interest, also there is no benefit from the money to you (because it's offset) and thus no BIK.

THEPUMA has posted on this before, opinion is divided about whether it will be effective though he does know what he is talking about. It would require a properly drafted and stamped trust deed."

The point being that if the money is in trust for the company, on deposit in a separate account - albeit in the directors name - then it is NOT a loan to the director. Thus no BIK consequences. The fact that it is offsetting the directors mortgage is purely incidental. It is also visibly repayable in an instance should it be required, this does perhaps slightly strengthen the non loan argument.

There could be any number of reasons why this was done. The improved compensation scheme for private over corporate depositors is one that springs to mind. Especially in these troubled times. Ok, so the company may be foregoing 0.01% interest or something but that is perhaps a fair price to pay for the additional security.

As I said originally the accounting profession is divided on the efficacy of this. There is plenty of comment both for and against. It is certainly aggressive though.

I'm not going to argue about whether it does or doesn't work. My example was simply based on the premise that it does work and to demonstrate that there can potentially be a better alternative to paying down debt now; it can be more effective to pay it over time.

To save you looking for THEPUMA posts here is one. You might also like to review the whole thread it's in.

http://forums.contractoruk.com/accou...ml#post1192134

[psychocandy]

Do you have 200k in your company and are looking at this as a viable solution or just looking out of interest? I thought you had only just come back to contracting.

No. The 200K was something ASB brought up in his example.

All company money for me this year is likely to be doled out in dividends between myself and wife and possibly wont exceed upper rate.

[psychocandy]

Yes you are right. I had forgotten that the 40% band is limited now.



No you're not. That's the whole point. Offset mortgage x, cash in an offset account x, net interest payable = zero. So in example 2 the mortgage is still paid off after 7 years. The total paid to the mortgage is the same (140k). The difference is that the individual hasn't had to pay any 40% (or greater) tax along the way.



Yes, keep the company money in an account which is offset against the mortgage. The mortgage payments are made by the recipient of the dividend.



If it were a directors loan then there would be BIK Based on nominal interest (unless adequate interest were paid). There would also be S419 tax involved. Even so it is possible that could still be cost effective but there is no way I'm going to bother working out those numbers.

This sub-discussion in fact started from my earlier comment to css_jay of:-

"One mortgage idea is to place the company funds on deposit (in trust for the company) into an account which is offset against the mortgage. You don't pay mortgage interest, also there is no benefit from the money to you (because it's offset) and thus no BIK.

THEPUMA has posted on this before, opinion is divided about whether it will be effective though he does know what he is talking about. It would require a properly drafted and stamped trust deed."

The point being that if the money is in trust for the company, on deposit in a separate account - albeit in the directors name - then it is NOT a loan to the director. Thus no BIK consequences. The fact that it is offsetting the directors mortgage is purely incidental. It is also visibly repayable in an instance should it be required, this does perhaps slightly strengthen the non loan argument.

There could be any number of reasons why this was done. The improved compensation scheme for private over corporate depositors is one that springs to mind. Especially in these troubled times. Ok, so the company may be foregoing 0.01% interest or something but that is perhaps a fair price to pay for the additional security.

As I said originally the accounting profession is divided on the efficacy of this. There is plenty of comment both for and against. It is certainly aggressive though.

I'm not going to argue about whether it does or doesn't work. My example was simply based on the premise that it does work and to demonstrate that there can potentially be a better alternative to paying down debt now; it can be more effective to pay it over time.

To save you looking for THEPUMA posts here is one. You might also like to review the whole thread it's in.

http://forums.contractoruk.com/accou...ml#post1192134

OK. Fair enough. So basically the companies money is held in trust offsetting a personal mortgage?

Hmmm. Didnt know you could do this? Surely its a BIK for the person?

[northernladuk]

OK. Fair enough. So basically the companies money is held in trust offsetting a personal mortgage?

You are getting there

Hmmm. Didnt know you could do this? Surely its a BIK for the person?

No one has ever done it, it has just been proposed by THEPUMA so not tested. Like any scheme like this HMRC will probably take a dim opinion and try and fight it and lose. You are guessing about the BIK now.

[psychocandy]

You are getting there



No one has ever done it, it has just been proposed by THEPUMA so not tested. Like any scheme like this HMRC will probably take a dim opinion and try and fight it and lose. You are guessing about the BIK now.

Everyone on here always bangs on about the difference between company money and personal money. This would just be an attempt to combine the two and get an advantage out of it.