Sizeable loan or take the hit on dividend?

[ChimpMaster]

Hey all

I need to extract a large sum from my company but am wondering how to do this in the most tax efficient manner. The sums involved are in the region of £50k.

I see 3 main options:-

1. Salary/bonus is worst case, attracting highest rate of tax.

2. As for dividends - my wife and I are 50/50 shareholders and we are both already maxxed out to the 40% tax threshold. So any further dividends will attract the additional tax as expected.

2. Loan. Now, my plans for next year involve closing the company, as per some of my previous posts on CUK. So I was thinking, could I take a loan, for a term of around a year, and pay interest to my company on that loan (say 5% APR). And then when the company is liquidated, repay the loan back then with the funds from liquidation?

The loan route - if feasible - would be more efficient because liquidation will mean a lower tax burden, even when accounting for the 5% interest I would pay on the loan.

I will of course be discussing with my accountant, but wanted to get some real-life knowledge here too.

The main foreseeable problem is what happens if I don't liquidate the company for whatever reason; in this case I accept that I would eventually have to pay a dividend to pay off the loan (and hence pay tax anyway).

Are there any holes in my 'loan' option? Or are there any options I haven't thought of?

[Maslins]

It does sound like the loan option might be a reasonable one.

Pay 4% interest on it and you won't suffer a BiK.

This doesn't get around the S.419/S.455 issue (the 25% temporary tax). How does your year end line up with you wanting to borrow the money? If you can borrow it just after a year end, you'll potentially have ~20 months before it needs repaying without a tax hit.

If you liquidate during that time, great. If you don't, like you say you can take the additional dividend (and personal tax hit) then.

[ChimpMaster]

It does sound like the loan option might be a reasonable one.

Pay 4% interest on it and you won't suffer a BiK.

This doesn't get around the S.419/S.455 issue (the 25% temporary tax). How does your year end line up with you wanting to borrow the money? If you can borrow it just after a year end, you'll potentially have ~20 months before it needs repaying without a tax hit.

If you liquidate during that time, great. If you don't, like you say you can take the additional dividend (and personal tax hit) then.

Damnit I'd forgotten about S.419/S.455. If I borrow the money it will certainly be before April 2013 (my end of year). I'll have to work out how S.419/S.455 affects this.

[framework]

I am doing a similar thing just now.
Basically as below..

1. Pay out 15k as loan now.
2. Company year end is end July 2013.
3. Pay back 10k by end of July 2013.
4. Pay back remaining 5k by 6th april 2014 (9 months after year end)

If you are nearing the ceiling for dividend payments for this tax year then this would be the most efficient way to get around this.

Cheers.

[ChimpMaster]

I am doing a similar thing just now.
Basically as below..

1. Pay out 15k as loan now.
2. Company year end is end July 2013.
3. Pay back 10k by end of July 2013.
4. Pay back remaining 5k by 6th april 2014 (9 months after year end)

If you are nearing the ceiling for dividend payments for this tax year then this would be the most efficient way to get around this.

Cheers.

Hi and thanks. What would happen if you couldn't pay back the £10k by end of July 2013?

[Maslins]

Damnit I'd forgotten about S.419/S.455. If I borrow the money it will certainly be before April 2013 (my end of year). I'll have to work out how S.419/S.455 affects this.

Assuming it will be a fairly long term loan, then instead of taking £50k, you could take £40k, allowing for £10k temporary tax to HMRC. If the company's cash rich this shouldn't pose too much of a problem.

Generally speaking I wouldn't recommend this method in an ideal world, as you will end up getting a few headaches from it...but it is an option. If you do go for it, try to be as "clean" as possible with the loan. Ie take it all in one round lump sum, leaving it at a clear balance. If you start taking bits and bobs here and there, with occasional repayments of a few £k it'll be far harder to keep track of/work out the interest etc.

[Martin at NixonWilliams]

Damnit I'd forgotten about S.419/S.455. If I borrow the money it will certainly be before April 2013 (my end of year). I'll have to work out how S.419/S.455 affects this.

As you need the money before April 2013, you could shorten your yearend to the month immediately before the month you intend to take the loan. This will defer the date in which the loan must be repaid in order to avoid S455 tax.

For example - If you were to shorten your yearend to 31st December 2012 with the intention of taking the loan in January 2013, the loan could be repaid any time up to 30th September 2014 without paying S455 tax.

If you leave your yearend date as it is and take the loan in this period, the date in which the loan must be repaid to avoid S455 tax will be 31st January 2014 (9 months from your current yearend).

I am unsure how this affects you given your future intentions to liquidate etc., but I hope you find this useful.

Martin

[ChimpMaster]

As you need the money before April 2013, you could shorten your yearend to the month immediately before the month you intend to take the loan. This will defer the date in which the loan must be repaid in order to avoid S455 tax.

For example - If you were to shorten your yearend to 31st December 2012 with the intention of taking the loan in January 2013, the loan could be repaid any time up to 30th September 2014 without paying S455 tax.

If you leave your yearend date as it is and take the loan in this period, the date in which the loan must be repaid to avoid S455 tax will be 31st January 2014 (9 months from your current yearend).

I am unsure how this affects you given your future intentions to liquidate etc., but I hope you find this useful.

Martin

Martin, thanks for contributing. My year end is April 2013 - if I take the money out now, are you saying that I have until Jan 2014 to repay (+ interest) before I incur s455 tax?

Jan 2014 would most likely be OK, because there's no way I can see this contract running until then - and it is my last contract for sure, for a long while anyway... so I will liquidate and repay the loan before then.

[Wanderer]

Martin, thanks for contributing. My year end is April 2013 - if I take the money out now, are you saying that I have until Jan 2014 to repay (+ interest) before I incur s455 tax?

Yes, pretty much but find out the exact dates because 9 months after the company year end is the drop dead date, miss it by a day and you will have to pay 25% of the loan to HMRC. It's refundable but not for quite some time so don't get it wrong or you will pay da price.

Have a read of what HMRC says about directors loans which explains the different scenarios pretty well. That link talks about BIK quite a lot, but remember that if you pay interest at the offical rate for beneficial loans (currently 4%) then there is no BIK and that interest becomes company profit which can be paid back to you as paye/dividend/capital-distribution or whatever.

More detailed and probably not relevant to you if you stay within the rules is the tool kit explaining what they look for when they investigate directors loans. As far as I can see you are ok if you follow the rules but I'm not an accountant and you have to be 100% sure on this one so get advice.

One possible gotcha not mentioned yet is that loans of > £10,000 require shareholder approval by ordinary resolution at a general meeting or in writing/email. See Section 197 of the Companies Act 2006.

From what I can understand the law requires the memorandum or meeting minutes to contain:

• a statement of approval for the loan to be made
• the amount of the loan
• the nature and purpose of the loan
• the extent of any liability under any transaction connected with the loan.

I'm sure our helpful accountant friends on this forum will know all about this and one of them will be able to come up with a template you could use.

[Martin at NixonWilliams]

Martin, thanks for contributing. My year end is April 2013 - if I take the money out now, are you saying that I have until Jan 2014 to repay (+ interest) before I incur s455 tax?

Jan 2014 would most likely be OK, because there's no way I can see this contract running until then - and it is my last contract for sure, for a long while anyway... so I will liquidate and repay the loan before then.

That is correct, you could repay the loan any time up to 31st January 14 assuming the period spans May 12 to April 13. If the April yearend is an extended yearend earlier dates may apply. As Wanderer says, it is important that this deadline is not missed as the repercussions could be costly!

Technically speaking, a special resolution must be passed for loans in excess of £10,000. However, in practice this rarely happens for one man (plus wife) corporations such as your own.

Finally, note that the liquidator may want to see the loan physically repaid to the company before the remaining funds are distributed to shareholders. It is unlikely that this will be imposed if there are no other creditors waiting to be paid as a result of you having the loan but it is something to be aware of.

I hope this helps.

Martin