Directors Loans

[decho]

I have a substantial amount of funds sitting in a business account earning very little interest. I only take enough dividend from my company to keep me below the higher rate Personal Tax and am keeping this money in the business for the 'lean' years. I have spoken to 2 different accountants who gave me different answers to this. If I take £30k from my company as a Directors loan, invest in a persoanl account earning 2.8%(for example) then pay it back before the end of my company's Financial year.....

Is it legal? Accountant A says yes B says no
Do I have to raise a P11D? A says no, B says yes
Do I have to pay interest on the load? A says no, B says yes
Thanks.

[minstrel]

I don't think either accountant is correct.

Yes it's legal - providing you deal with it correctly and pay back in full before year end.

If you pay interest at the HMRC approved rate (currently 4%), then there is no need to declare on P11D.

If you don't pay interest then you do have to declare it on P11D and pay tax and NI as it's treated as a benefit in kind.

Whether or not it's worthwhile depends on your situation.

If you earn 2.8% net interest personally and then pay your company 4% you will be 2.8 - 4 = -1.2% at this stage. The 4% interest will be additional income for the company which would incur 20% CT leaving 3.2% which could then be distributed as dividends so you could end up -1.2% + 3.2% = 2% better off.

However, you can easily lose most of the benefit if you are high rate tax payer. Say you earn 2.8% gross interest and you are taxed at 40%, you would have 1.68% net interest personally. Pay your company 4% and you would be -2.32%. The 4% interest earned by company would be 3.2% after CT. If this is distributed and subject to higher rate tax on dividend you would have a net dividend of 2.4%. -2.32% + 2.4% = 0.08%.

By my calculations it's only worth it if you can earn a higher personal interest rate or you use the funds to offset a mortgage effectively making it tax free interest.

[Greg@CapitalCity]

Hi decho,

For the record, my answers would be;
(1) Yes, its legal;
(2) There are no P11D issues provided you pay interest to your company at the prescribed HMRC rates (currently 4%);
(3) You don't have to pay interest on the loan, but if this were the case, then it needs to be reported on the P11D;
(4) You have until nine months after your year end to repay the loan (to avoid the S455 25% loan tax), so you could conceivably hold the loan for 21 months if you took it out on the first day of the new company accounting year.

[northernladuk]

I don't think either accountant is correct.

Yes it's legal - providing you deal with it correctly and pay back in full before year end.

If you pay interest at the HMRC approved rate (currently 4%), then there is no need to declare on P11D.

If you don't pay interest then you do have to declare it on P11D and pay tax and NI as it's treated as a benefit in kind.

Whether or not it's worthwhile depends on your situation.

If you earn 2.8% net interest personally and then pay your company 4% you will be 2.8 - 4 = -1.2% at this stage. The 4% interest will be additional income for the company which would incur 20% CT leaving 3.2% which could then be distributed as dividends so you could end up -1.2% + 3.2% = 2% better off.

However, you can easily lose most of the benefit if you are high rate tax payer. Say you earn 2.8% gross interest and you are taxed at 40%, you would have 1.68% net interest personally. Pay your company 4% and you would be -2.32%. The 4% interest earned by company would be 3.2% after CT. If this is distributed and subject to higher rate tax on dividend you would have a net dividend of 2.4%. -2.32% + 2.4% = 0.08%.

By my calculations it's only worth it if you can earn a higher personal interest rate or you use the funds to offset a mortgage effectively making it tax free interest.

Very nice post.

[Nixon Williams]

It could be legal but as the loan will exceed £10,000, you should obtain the approval of the shareholders.

Whilst I appreciate that it is highly likely that you and the 'shareholders' are the same - if you do not get the correct paperwork in place you could risk falling on the w rong side of HMRC.

Generally, we would advise against taking any director loan, as it is not worth the effort and for the difficulties you may get into if you do not get ir right.

Alan

[Kugel]

I have a substantial amount of funds sitting in a business account earning very little interest.

Perhaps, you should consider business deposit accounts that pay higher interest. For example:

3.1% (Shawbrook - 1 Year Fixed Rate Business Savings Bond - Issue 1).
3% (Santander - 1 Year Fixed Rate Business Bond).
2.9% (Shawbrook - 100 Day Notice Business Savings Account - Issue 2).
2.25% (Investec - Business High 5 Account, 3 months notice).
1.75% (Saffron BS - Business e-saver, instant access, £100,000 or over).
1.5% (Saffron BS - Business e-saver, instant access, £1,000 or over).

[minstrel]

It could be legal but as the loan will exceed £10,000, you should obtain the approval of the shareholders.

Whilst I appreciate that it is highly likely that you and the 'shareholders' are the same - if you do not get the correct paperwork in place you could risk falling on the w rong side of HMRC.

Generally, we would advise against taking any director loan, as it is not worth the effort and for the difficulties you may get into if you do not get ir right.

Alan

I agree you need to do the sums and work out whether it is worth the effort.

However, a couple of years ago when I was paying a comparatively high mortgage rate, I was using this technique and saving myself a couple of thousand pounds per year.

All you really need to do is ensure your business bank account has a very low balance, always sweeping the remainder to your personal account, and log the transactions in a spreadsheet.

Well worth the effort in my book!

[minstrel]

It's also worth pointing out that the one person who is guaranteed to be better off whatever the interest rate is HMRC. They shouldn't complain too much about a scheme that increases tax revenue at the expense of the banks.

In fact HMRC should be encouraging this. Say there are 100,000 small businesses with £10k in their bank account earning 0% interest. That's £1bn of dead money. If all that money was earning 4% interest and being taxed at 20% that's an additional £8 million for the exchequer.

[decho]

Thanks for all the very helpful info - it disturbs me that neither of the accountants gave me the correct and complete answer. I sometimes wonder what we pay them for, at least next time I need information I will know where to get it from

[blinko]

Why can'[t you take out a bond in a company name of sorts ?