House Deposit (Dividends, directors loan?)

[justasurname]

Hi All,

My accountant is currently away for the next 2 days, so I thought I'd ask here first.
FYI, I don't plan on doing anything until I've spoken to him first, just some guidance so I can formulate some questions/explain myself better to him later.

I've been contracting for just over two years now, and I have around £65,000 in my business account.

Currently I take £12,000 a year salary, with £4,000 a month dividend.
My daily rate is £425, averaging around £7225 invoiced each month.
(But this month I'm working with some other clients, so my business account should total £80,000 come the end of May).

I plan on using some of the £80,000 in the business account as a deposit on a house, around £45,000, but ideally as much as possible.
But I was unsure of the best way to go about getting that money, as it would push me into the higher tax bracket.

Would it be best to take it as dividends and pay the personal tax on that dividend?
Or would it be best to take a personal loan? I should be able to pay the loan back within 2-3 years.

Thanks!

[stek]

What does the person who's covering for your account say?

[TheCyclingProgrammer]

Taking a director's loan isn't an impossibility but there are numerous implications of taking a sizeable director's loan. In short, you can only take up to £10k without incurring a BIK or needing to charge interest - above that, you'd either have to pay interest at the HMRC specified rate or you'll incur a BIK tax charge. Additionally, any outstanding loans not repaid within 9 months after your company year end will result in a Corporation Tax charge of 25% of the outstanding loan amount. This will be repaid, but not until 9 months after the company year in which the loan is repaid.

If you want to go down the loan route you need to have a serious chat with your accountant about it but I think they'll try and discourage you and so would I.

Building up retained profit in the company as a war chest is great and if you can afford to take a chunk of this out as a dividend for a house deposit and still leave a reasonable war chest + reserves to cover all your liabilities, then good for you. You should do this and take the tax hit. You have to take the tax hit eventually. Just remember that when you fill out your self-assessment, it will probably ask you to make payments on account for the following year. If the large dividend is a one-off and you don't expect to pay higher rate tax the following year, then you might want to file a request to reduce the payments on account to nil.

[jamesbrown]

Aside from the tax and accounting implications of taking a Director's Loan, you need to consider the mortgage implications of that being a liability to be repaid, not a cash deposit.

[Wanderer]

Would it be best to take it as dividends and pay the personal tax on that dividend? Or would it be best to take a personal loan? I should be able to pay the loan back within 2-3 years.

Ask about closing the company with a Members Voluntary Liquidation which may allow you to pay less tax on the retained funds. There are limitations on when you can do this though so you would need professional advice on your specific circumstances.

You can take a director's loan and pay interest to avoid a benefit in kind (then pay the interest back to your self minus corporation tax) but you will need to understand the implications of S660 and "bed and breakfasting" your loan.

Good luck

[TheCyclingProgrammer]

Aside from the tax and accounting implications of taking a Director's Loan, you need to consider the mortgage implications of that being a liability to be repaid, not a cash deposit.

Don't know why I completely forgot to mention this aspect in my post, having already discussed this with my mortgage broker a few months ago. In my case, I only wanted to borrow £10k to top up my existing deposit but even then most lenders are unlikely to accept a deposit sourced from a loan, even if its a director's loan.

So yes, another tick in the box for "take a dividend".

[TheCyclingProgrammer]

You can take a director's loan and pay interest to avoid a benefit in kind (then pay the interest back to your self minus corporation tax) but you will need to understand the implications of S660 and "bed and breakfasting" your loan.

I'm assuming you meant s455 (the corporation tax charge), not s660 (old settlements legislation).

Personally, I don't think MVLs should even be considered unless you're genuinely shutting up shop. You're just leaving yourself wide open to an HMRC challenge.

[eek]

Ask about closing the company with a Members Voluntary Liquidation which may allow you to pay less tax on the retained funds. There are limitations on when you can do this though so you would need professional advice on your specific circumstances.

Yep, the big one is that you can't start up another company doing the same thing immediately....

[VectraMan]

Aside from the tax and accounting implications of taking a Director's Loan, you need to consider the mortgage implications of that being a liability to be repaid, not a cash deposit.

Is the tax to be paid also a liability that the mortgage company would consider?

I.e. As we're into 14/15, you won't actually have to pay the tax until Jan 2016.

[TheCyclingProgrammer]

Is the tax to be paid also a liability that the mortgage company would consider?

I.e. As we're into 14/15, you won't actually have to pay the tax until Jan 2016.

Lenders will normally look at earnings before tax so I wouldn't have thought so.