Borrowing money instead of paying higher tax rate

[Podgy]

If you take a loan for 30K I presume only 25k needs to repay 4% interest?

My year end is November so theoretically I could take;

30K (Nov prior to year end date) - repay April 2014 from dividend with 4% interest on 25K
30K (Nov just after year end date) - repay April 2015 from dividend with 4% interest on 25K

Both repayments within the 9 month limit of the company y/e.

This would be for a house purchase & moving the company.

I know I've asked before but would there by anything that could go through the books for relocation

[Craig at Nixon Williams]

If you take a loan for 30K I presume only 25k needs to repay 4% interest?

My year end is November so theoretically I could take;

30K (Nov prior to year end date) - repay April 2014 from dividend with 4% interest on 25K
30K (Nov just after year end date) - repay April 2015 from dividend with 4% interest on 25K

Both repayments within the 9 month limit of the company y/e.

This would be for a house purchase & moving the company.

I know I've asked before but would there by anything that could go through the books for relocation

No - once the loan exceeds £5,000, HMRC will then be interested in the loan and interest/BIK will be charged on the full amount..see the £5,002 post from before.

There isn't anything that you could claim for relocation.

Craig

[northernladuk]

If you take a loan for 30K I presume only 25k needs to repay 4% interest?

My year end is November so theoretically I could take;

30K (Nov prior to year end date) - repay April 2014 from dividend with 4% interest on 25K
30K (Nov just after year end date) - repay April 2015 from dividend with 4% interest on 25K

Both repayments within the 9 month limit of the company y/e.

This would be for a house purchase & moving the company.

I know I've asked before but would there by anything that could go through the books for relocation

Wasn't there also some changes to the rules or addition of factors that, although these dates are within, star to look like bed and breakfast loans and will attract attention or even land the OP in a lot of bother if these dates aren't adhered to.. i.e. taking another loan out within 6 months of paying off the last one. I need to go find the details of the new rules before staking anything on my comments. Just something to be wary of?

[Podgy]

No - once the loan exceeds £5,000, HMRC will then be interested in the loan and interest/BIK will be charged on the full amount..see the £5,002 post from before.

There isn't anything that you could claim for relocation.

Craig

I would pay the 4% interest so it would'nt be a BIK as well would it? Just pay back with the 4% added?
Are you saying anything over 5K means the whole loan is subject to 4% i.e. the whole 30K - so effectively you lose the any of the exemption for the first 5K?

[eek]

I would pay the 4% interest so it would'nt be a BIK as well would it? Just pay back with the 4% added?
Are you saying anything over 5K means the whole loan is subject to 4% i.e. the whole 30K - so effectively you lose the any of the exemption for the first 5K?

Yes £5000 nothing to pay in interest
£5000.01 and above 4% interest on the lot.

But its only 4% and I doubt you can get the loan any cheaper elsewhere.

[SimonMac]

Would borrowing from this year and paying back next not leave you with less that you can take off next year so will again be in the same situation?

[Craig at Nixon Williams]

I would pay the 4% interest so it would'nt be a BIK as well would it? Just pay back with the 4% added?
Are you saying anything over 5K means the whole loan is subject to 4% i.e. the whole 30K - so effectively you lose the any of the exemption for the first 5K?

The benefit in kind is calculated by deducting the interest rate paid on the loan from HMRC's published interest rate (4% per annum at the moment). If no interest is paid on the loan then the BIK is 4% of the loan value - if you were to pay 3% then you would still need to pay 1% as a BIK.

You should consider whether it is more tax efficient to pay the BIK or pay interest or a mixture of both - if your non-savings income plus benefit in kind is less than your personal allowance then a BIK will not attract any additional tax (though would reduce the amount of dividends that you can take before hitting the HR threshold and you would pay employers NI on it still) - if your personal allowance is fully utilised by your non-savings income then generally it is better to just pay the interest. If you wanted to be really clever about it, you could calculate the rate of interest that you would need to pay in order to make the BIK value use us the rest of your NS band...gets a bit complex if you want to take it to this extreme though!

Craig

[Wanderer]

Directors Loans

It's been discussed here lots of times, do a search for Directors Loans. Also read HMRC's guidance and directors loans for the straight dope from HMRC.

I'm surprised that the accountants don't have guidance for this but I guess that they don't want their clients encouraged to do it then blow all the money and get themselves into a load of grief so they don't actively encourage it.

I am not an accountant but here's my take on it:

• If you take <£5k then there are no BIK implications so don't worry about it
• If you take >£5k then it becomes a BIK or you can elect to pay interest at the HMRC approved rate (currently 4%)
• If you take >£10k then it needs shareholder approval (a formality for most of us, do a board minute approving the loan signed by the shareholders)
• If the loan is paid back before the end of the company tax year then you don't have to tell HMRC
• If the loan is paid back before 9 months after the end of the company tax year then you have to tell HMRC but if you pay interest on the loan there are no tax implications
• If the loan is paid back after 9 months from the end of the company tax year then you have to tell HMRC and pay 25% of the loan to HMRC (S455 CTA 2010). This is refundable when the loan is repaid but it takes a while so it's best to avoid this.

It's your company so you can do what you like with the money. So here's how to do it.

• If the loan is >£10k then do a board meeting minute, signed by the shareholders to say that the loan has been approved.
• Repay the loan before the end of the company tax year or at the very latest before 9 months after the end of the company tax year. Do not miss this date or you will pay the price (S455 CTA 2010).
• Pay interest at the HMRC approved rate to avoid BIK (currently 4%). This becomes company income and is paid back to you minus CT at 20% so the net cost of the loan is 1% of the value.
• Watch out for the bed and breakfasting rules which mean you can't systematically pay off one loan and take out a new one.
• Before you do it, double check all this with your account and make 100% sure you know what the deadlines are for repayment so you don't miss them

It also goes without saying that you must treat it as a loan that you pay back rather than blowing all the money so don't go doing this if you are "no good with money".

[Craig at Nixon Williams]

I'm surprised that the accountants don't have guidance for this but I guess that they don't want their clients encouraged to do it then blow all the money and get themselves into a load of grief so they don't actively encourage it.

Absolutely...taking loans can open up a world of problems if it is not done correctly so we would never actively encourage it unless the client has a good reason for it, enough cash to pay all tax liabilities after the loan has been taken and specific plans on how it will be repaid.

Pay interest at the HMRC approved rate to avoid BIK (currently 4%). This becomes company income and is paid back to you minus CT at 20% so the net cost of the loan is 1% of the value.

Depending on the circumstances the BIK route can be more tax efficient (see my last post in this thread).

Craig

[Podgy]

Would borrowing from this year and paying back next not leave you with less that you can take off next year so will again be in the same situation?

No - I'm basically using the loans as a mechanism to take the dividends early for the house purchase. I take the full dividends at the beginning of April each year.

The new house is a bit more pricey but definately dont want any mortgage on it.