Reply to: Director Loan repayment with Dividend Income - Tax implications

[TheCyclingProgrammer]

This has been discussed on here before but I'm pretty sure the consensus was that charging interest at HMRC prescribed rates is not only less hassle than declaring the BIK, it's financially the better option because, as you say, the effective rate is much smaller as 80% of the interest paid will become retained profit.

If you have the cash flow to take the temporary hit of the s455 charge then I can't see any downsides as long as you have a sensible repayment plan in place. It's cheaper than getting a loan elsewhere.

[Peter Loew]

Way around the BIK

I was just having a brief exchange with my accountant on company loans as I am thinking of drawing around 15k to pay back over a period of around 3 years. He said that a way round the BIK is for the company to charge me the HMRC interest base (at 3.25% now), so no BIK would be incurred. So the only thing to bear in mind is the S455 (which is covered by healthy cashflow and recovered after loan pay-off).

When paying back the interest, he said this can be done monthly as part of the loan repayments, or it can be added to the exiting loan paid by me in the year. Of course the interest paid to the company is assessable income.

Assuming you have the cashflow for the S455 and are fine with that, and that you want to take out a loan >10k or pay back beyond the 9 months, surely this is a better option than doing the BIK route or personal loan route, as you're paying back into your own company is more beneficial?

[TheCyclingProgrammer]

coolguycp1: I believe the s455 tax will be calculated based on the outstanding amount in July 2015 and will be reported on your Corporation Tax return for your year end Oct 2014.

If you continue to pay this off and manage to pay it off by Oct 2015, then you will be due a refund on your 2014-15 CT bill in July 2016. That gives you over a year to pay it off and you'll have the tax back in 2 years.

If you pay it off after Oct 2015 but before Oct 2016, you'll be due the tax back in July 2017.

I'm 90% certain the above is correct so you should check this with your accountant.

Edit: the s455 will of course become payable at the same time as the rest of your CT which is before the due date of the actual return that it will be reported on.

[ContrataxLtd]

Do you mean to say that the S455 surcharge shall be due for payment on end of July?

That's correct, the s455 is due at the same time as the normal corporation tax payment.

Martin
Contratax Ltd

[coolguycp1]

Hi coolguycp

Let me get this right, you've taken a £10k loan from your company sometime this tax year and already repaid £4k via dividends therefore £6k is currently outstanding. YourCo year end is 31st October 2014.

Correct

As the loan has never exceeded £10k no interest needs to be charged and it's not a benefit in kind on you personally - just make sure nothing else accidentally took you over the £10k limit (overpaid salary/expenses etc.).

Thats good news. So, there is no BIK if the loan does not exceed £10K at any time till the repayment is completed, and I will ensure the outstanding loan is never over £10K.

Hi coolguycp

If you fully repay the loan by end July 2015 there will be no s455 charged so this gives you just under a year to clear the loan which hopefully would be possible? If not, you will pay s455 at 25% of the loan outstanding at the end of July.

Do you mean to say that the S455 surcharge shall be due for payment on end of July?

So if you are struggling to repay the loan to your company this would probably be advantageous over taking a personal loan to clear it because you are still going to have to make repayments on the personal loan and will end up paying interest to the loan provider which will cost you money. This obviously assumes your company cash flow is strong enough to cope with lending HMRC some money for a year or two.

I certainly agree with your final assessment that a personal loan would be a more expensive option than taking company loan.

[TheCyclingProgrammer]

If the loan exceeds £10k at any stage in the year, then there would be interest to pay. If not, then there isn't. I was merely painting a worst-case scenario.

Fair enough, but I think you confused OP (or maybe they were confused already). It does seem like their intention is for the loan to keep going down, not up.

[TheFaQQer]

I don't understand why you think OP would pay any interest on their directors loan.

If the loan exceeds £10k at any stage in the year, then there would be interest to pay. If not, then there isn't. I was merely painting a worst-case scenario.

[TheCyclingProgrammer]

Just to explain a bit more, the company’s tax year runs until 31st October. I have already repaid £4K off the £10K directors loan from my dividend income.

If I understand correctly, if I decide not to repay any further to my directors loan account for my current tax year, i.e., until April 15, I will have a BIK for the outstanding loan of £6K for which the company will charge me an interest @3.5% until the amount is repaid.

I can then repay the balance £6K in my next tax year (FY15-16), and if I pay this amount before July 15 (9 months and 1 day after the company’s tax year), no S455 tax is to be paid, otherwise I have to pay a S445 surcharge @25% of £6K which shall be returned back to me in the tax year following the repayment of the loan.

Apologies if I have not been clear, but I now seem to understand why 3.5% interested rate is better than taking a personal loan.

I'm going to say this again. There is no beneficial loan charge, interest or BIK on loans up to £10k.

The only issue you have is the s455 surcharge but this is recoverable once you've paid off the loan.

As Martin said, this is just a cash flow problem. If YourCo has the cash flow to pay the tax and wait until 9 months after the year in which you repay the loan to recover it then the cheapest option overall is to just keep making regular repayments and pay the s455 tax.

[TheCyclingProgrammer]

Taking a personal loan at 6% to repay a loan that you would pay 3.25% on doesn't seem to be smart to me. Maybe I'm missing something here.

I don't understand why you think OP would pay any interest on their directors loan.

[northernladuk]

I would have, if my accountant would have been forthcoming with all this info even after asking him, but you probably might be aware of the added value that some accountants usually promise when asking for business but never quite deliver on those promises!

Indeed. Have been stung by that in the past so switched to SJD and don't have that problem anymore. Time to switch?

[coolguycp1]

Isn't it time you started speaking to your accountant??

I would have, if my accountant would have been forthcoming with all this info even after asking him, but you probably might be aware of the added value that some accountants usually promise when asking for business but never quite deliver on those promises!

[ContrataxLtd]

Just to explain a bit more, the company’s tax year runs until 31st October. I have already repaid £4K off the £10K directors loan from my dividend income.

If I understand correctly, if I decide not to repay any further to my directors loan account for my current tax year, i.e., until April 15, I will have a BIK for the outstanding loan of £6K for which the company will charge me an interest @3.5% until the amount is repaid.

I can then repay the balance £6K in my next tax year (FY15-16), and if I pay this amount before July 15 (9 months and 1 day after the company’s tax year), no S455 tax is to be paid, otherwise I have to pay a S445 surcharge @25% of £6K which shall be returned back to me in the tax year following the repayment of the loan.

Apologies if I have not been clear, but I now seem to understand why 3.5% interested rate is better than taking a personal loan.

Hi coolguycp

Let me get this right, you've taken a £10k loan from your company sometime this tax year and already repaid £4k via dividends therefore £6k is currently outstanding. YourCo year end is 31st October 2014.

As the loan has never exceeded £10k no interest needs to be charged and it's not a benefit in kind on you personally - just make sure nothing else accidentally took you over the £10k limit (overpaid salary/expenses etc.).

If you fully repay the loan by end July 2015 there will be no s455 charged so this gives you just under a year to clear the loan which hopefully would be possible? If not, you will pay s455 at 25% of the loan outstanding at the end of July.

Paying the s455 is only a cash flow issue, it won't actually cost you anything in the long run (forgetting opportunity costs of not having the money etc.).

So if you are struggling to repay the loan to your company this would probably be advantageous over taking a personal loan to clear it because you are still going to have to make repayments on the personal loan and will end up paying interest to the loan provider which will cost you money. This obviously assumes your company cash flow is strong enough to cope with lending HMRC some money for a year or two.

HTH

Martin
Contratax Ltd

[northernladuk]

Isn't it time you started speaking to your accountant??

[coolguycp1]

Taking a personal loan at 6% to repay a loan that you would pay 3.25% on doesn't seem to be smart to me. Maybe I'm missing something here.

Just to explain a bit more, the company’s tax year runs until 31st October. I have already repaid £4K off the £10K directors loan from my dividend income.

If I understand correctly, if I decide not to repay any further to my directors loan account for my current tax year, i.e., until April 15, I will have a BIK for the outstanding loan of £6K for which the company will charge me an interest @3.5% until the amount is repaid.

I can then repay the balance £6K in my next tax year (FY15-16), and if I pay this amount before July 15 (9 months and 1 day after the company’s tax year), no S455 tax is to be paid, otherwise I have to pay a S445 surcharge @25% of £6K which shall be returned back to me in the tax year following the repayment of the loan.

Apologies if I have not been clear, but I now seem to understand why 3.5% interested rate is better than taking a personal loan.

[TheFaQQer]

The personal loans APR for upto £15K are currently in the region of 5-6% which is certainly below the dividend rate of tax on higher tax band. Is this the right approach?

Taking a personal loan at 6% to repay a loan that you would pay 3.25% on doesn't seem to be smart to me. Maybe I'm missing something here.