Borrowing money instead of paying higher tax rate

[yasockie]

The 4% interest is paid into the company account isn't it? therefore the real cost to the company is just the CGT on the 4%, right?

[Craig at Nixon Williams]

The 4% interest is paid into the company account isn't it? therefore the real cost to the company is just the CGT on the 4%, right?

The 4% is paid to the company so company income is increased by whatever this is and so the corporation tax payable will increase by 20% of this figure.

Craig

[Podgy]

Thanks for all your great replies.

If I'm reading it all correctly;

I would be paying £100 per month interest on 30K Loan;

I would pay appox 4 months interest for loan 1 = 400
I would pay approx 16 months interest for loan 2 = 1600

The interest would be income to the company which will be subject to CT @20%.

So effectively the cost of the loan to me (as the sole director) is £400 - but it would also be split over the 2 accounting years (Loan 1 repaid 2014 @ 30400 / Loan 2 repaid 2015 @ 31600).

I presuming you can pay the interest in a lump sum when you pay the loan back.

& must make sure that there is enough reserves/income for payback plus CT due in 2014, vat, and monthly salary.

Does anyone have a good calculator!

[NorthWestPerm2Contr]

Thanks for all your great replies.

If I'm reading it all correctly;

I would be paying £100 per month interest on 30K Loan;

I would pay appox 4 months interest for loan 1 = 400
I would pay approx 16 months interest for loan 2 = 1600

The interest would be income to the company which will be subject to CT @20%.

So effectively the cost of the loan to me (as the sole director) is £400 - but it would also be split over the 2 accounting years (Loan 1 repaid 2014 @ 30400 / Loan 2 repaid 2015 @ 31600).

I presuming you can pay the interest in a lump sum when you pay the loan back.

& must make sure that there is enough reserves/income for payback plus CT due in 2014, vat, and monthly salary.

Does anyone have a good calculator!

I'm finding all this a little confusing..... A solid example of how this would all work would really help....

The next logical question from this is investing in property - if you are up to your limit, it would make sense to buy a commercial property and put it through ltd rather than to pay the extra tax and to buy a BTL in your name?

[Wanderer]

I'm finding all this a little confusing..... A solid example of how this would all work would really help....

Imagine today is the 10th April 2013. The director and shareholders have just taken dividends up to the higher rate limit for the 2013/14 financial year.

The company still has retained profits of > £60k and its year end is 8th April.

A board meeting is held and the shareholders approve a directors a loan of £60k, repayable on the 7th April 2014 with 4% interest.

...

One year later on the 7th April 2014 a £60k dividend for the 2014/15 personal tax year is declared out of retained profits and split 50/50 between the director and spouse who are 50/50 shareholders. This cash is then used to repay the director's loan.

In a separate transaction, £2,400 in interest is paid to the company by the director. This interest is accounted for as company income and £480 corporation tax is due leaving £1,920 profits to be distributed to the shareholders.

The net result is that the director has benefited from a £60k loan for a year at a net cost of £480 or 0.8% interest and this was never declared to HMRC because it was repaid before the end of the company tax year. However, the director and spouse have now used up all of their tax allowance for the 2014/15 year and it's still only April 2014 so I really don't know what they are going to use to live on unless they have savings they can draw on and they can retain the company income in the company until the next personal tax year.

If your company tax year doesn't line up with the personal tax year using the dates shown then it's more complex but the principle is the same. Having the loan outstanding at the company year end is OK but you will have to declare it to HMRC which you may not want to do if you are interested in keeping a low profile.

Having the loan outstanding 9 months after the company year end will mean you get hit with a big tax bill (S455 CTA) so avoid that unless this is your long term strategy for extracting money from the company (feasible if you have a lot of retained funds you want to borrow long term and you don't want to do a MVL - professional advice is required).

The catch is that you can't repay the loan and then take out a new one the next day because it will be caught by the "bed and breakfasting" rule but a loan may be useful if you want to defer the tax for a year or so, ie if you you intend to do a MVL at some time in the near future.

From what I have read, you may get away with bed and breakfasting a loan if you actually pay the loan back rather than just doing a paper transaction like declaring a dividend to clear the loan but that's pretty aggressive tax avoidance and HMRC will not like it if they find out. Depends how close to the wind you want to sail. See section 8 of this document

Another interesting point is that a directors loan can be written off without tax implications if the director dies...


That is enough information now. I looked at all this in detail but decided not to go ahead with it but that is what I found out, I'm not an accountant so some of it could be wrong. As previously stated and confirmed by some of the accountants here, your accountant probably won't want to encourage you to do this because there is a huge potential for it to go horribly wrong. Certainly if I was running an accountancy business charging highly competitive monthly rates to contractors, I wouldn't be sticking my head about the parapet and recommending this either.

Now you need to have a detailed discussion with your accountant based on your own company year end dates, the amount you want to borrow, the amount you have retained in the company, the loan and critical repayment dates etc.

The next logical question from this is investing in property - if you are up to your limit, it would make sense to buy a commercial property and put it through ltd rather than to pay the extra tax and to buy a BTL in your name?

I seem to recall that the quick answer is that the capital gains tax treatment on the property wouldn't be very favourable. That's been discussed quite a lot, you need to do a search to find the full answer...

[NorthWestPerm2Contr]

Imagine today is the 10th April 2013. The director and shareholders have just taken dividends up to the higher rate limit for the 2013/14 financial year.

The company still has retained profits of > £60k and its year end is 8th April.

A board meeting is held and the shareholders approve a directors a loan of £60k, repayable on the 7th April 2014 with 4% interest.

...

One year later on the 7th April 2014 a £60k dividend for the 2014/15 personal tax year is declared out of retained profits and split 50/50 between the director and spouse who are 50/50 shareholders. This cash is then used to repay the director's loan.

In a separate transaction, £2,400 in interest is paid to the company by the director. This interest is accounted for as company income and £480 corporation tax is due leaving £1,920 profits to be distributed to the shareholders.

The net result is that the director has benefited from a £60k loan for a year at a net cost of £480 or 0.8% interest and this was never declared to HMRC because it was repaid before the end of the company tax year. However, the director and spouse have now used up all of their tax allowance for the 2014/15 year and it's still only April 2014 so I really don't know what they are going to use to live on unless they have savings they can draw on and they can retain the company income in the company until the next personal tax year.

If your company tax year doesn't line up with the personal tax year using the dates shown then it's more complex but the principle is the same. Having the loan outstanding at the company year end is OK but you will have to declare it to HMRC which you may not want to do if you are interested in keeping a low profile.

Having the loan outstanding 9 months after the company year end will mean you get hit with a big tax bill (S455 CTA) so avoid that unless this is your long term strategy for extracting money from the company (feasible if you have a lot of retained funds you want to borrow long term and you don't want to do a MVL - professional advice is required).

The catch is that you can't repay the loan and then take out a new one the next day because it will be caught by the "bed and breakfasting" rule but a loan may be useful if you want to defer the tax for a year or so, ie if you you intend to do a MVL at some time in the near future.

From what I have read, you may get away with bed and breakfasting a loan if you actually pay the loan back rather than just doing a paper transaction like declaring a dividend to clear the loan but that's pretty aggressive tax avoidance and HMRC will not like it if they find out. Depends how close to the wind you want to sail. See section 8 of this document

Another interesting point is that a directors loan can be written off without tax implications if the director dies...


That is enough information now. I looked at all this in detail but decided not to go ahead with it but that is what I found out, I'm not an accountant so some of it could be wrong. As previously stated and confirmed by some of the accountants here, your accountant probably won't want to encourage you to do this because there is a huge potential for it to go horribly wrong. Certainly if I was running an accountancy business charging highly competitive monthly rates to contractors, I wouldn't be sticking my head about the parapet and recommending this either.

Now you need to have a detailed discussion with your accountant based on your own company year end dates, the amount you want to borrow, the amount you have retained in the company, the loan and critical repayment dates etc.



I seem to recall that the quick answer is that the capital gains tax treatment on the property wouldn't be very favourable. That's been discussed quite a lot, you need to do a search to find the full answer...

Superb post - you deserve a nomination for CUKer of the year after that.....

Thanks