Reply to: Selling debt to the company

[ASB]

Ok, it is a slow day and there are a load of assumptions.

- You have a personal loan of £20,000, over 3 years, @ 5.8 APR = 605.28 p.m. (A pretty 'normal' loan). [21790.08 repayable]

- You borrow 20k from the company, repay the above without penalty and repay the company @ 555.56 (to make my life easier).

After one year the loan balance is 20,000 - 6,666.72 = 13,333.28. Your average loan is 16,666.64 and interest of 3.25% is due which is 541.67 (you could use an exact method of calculation which would be slightly to your benefit but I can't be bothered)

After two years the loan balance is 13,333.28 - 6,666.72 = 6666.56. Average = 9999.92, interest = 325.00

After three years the balance is 6,666.72 - 6,666.72 = 0. Average = 3,333.36, interest = 108.33

So, your total repayments are 20,000 + 975 = 20,975.

So you end up £815 better off (the difference in cost between the equivalent loan).

The company has made 975 less tax = 780

But, in month 21 the company would have paid 3333.32 in corp tax. This is reclaimable in month 45. What is the cost of this? if the co was always in the black then it is probably minimal. About 100 quid at most in lost interest. But there is also the potential question of opportunity cost because the funds were not available for any business purposes.

Of course, my calculations could be completely wrong. But on the face of it there could be a worthwhile saving by taking loans from the company and paying off your more expensive personal credit.

[Rob79]

To the best of my knowledge it's not possible to transfer a debt obligation to another party.

Therefore if you owe the bank/credit card company, it would not be possible to transfer that liability to your company.

You borrow from another source (YourCo) and pay off the loans, but you then have a loan from YourCo and others have already commented upon the tax implications of that.

In terms of regulation and FSA etc, so long as the Articles of the company permit lending you should be OK.

You do want to be careful that the business of YourCo does not become predominantly lending as that will mess with you VAT recovery/payment as lending is usually exempt.

[LisaContractorUmbrella]

Because the cost in additional tax to take the money out of the company exceeds the cost of interest in borrowing the money from the company.

Though if this is for normal day-to-day excess, then I'd question how the loan will ever be repaid.

Ok thanks - all sounds a bit dodgy though

[TheFaQQer]

I may well have missed something here but the OP said that 'there is a fair amount of money accrued in my business account' and then went on to talk about outstanding loans that he wants to transfer to the company all the while accruing interest? If there's money lying around why not pay of the loans

Because the cost in additional tax to take the money out of the company exceeds the cost of interest in borrowing the money from the company.

Though if this is for normal day-to-day excess, then I'd question how the loan will ever be repaid.

[LisaContractorUmbrella]

I may well have missed something here but the OP said that 'there is a fair amount of money accrued in my business account' and then went on to talk about outstanding loans that he wants to transfer to the company all the while accruing interest? If there's money lying around why not pay of the loans

[ASB]

I see. In which case borrowing from the company could work out.

but, if you want it for general day to day expenditure how are you going to repay it? Presumably from future income in due course. This may well cause you to go over the lower rate threshold and have the tax hit anyway. Also you have had the tax hit whilst the loans are outstanding.

though if you are using them to pay down other loans then those repayments ould be diverted back. This seems to he your plan.

check the loan schedules about penalties or charges etc.

it might suit your circumstances accounting for the act and the interest you pay the company - which is taxable.

[ndoody]

I'm glad you've managed to get your head round directors loans but please do run this past your accountant first.

For starters check the HMRC published interest rates, I'm pretty sure you only need to charge 3.25% but be aware this could change.

I'm also not sure you would have to pay a surcharge each year under s455: the entire tax charge would apply to your first CT bill after taking the loan. You wouldn't need to keep paying this each year, but you won't get it back until the initial loan is repaid in full. It's essentially an anti avoidance measure to prevent remuneration disguised as loans but it shouldn't be detrimental for a genuine loan in the long term.

Thanks a lot, I definitely will.

And yes, it is exactly that - a genuine long term loan, not trying to devoid hmrc out of any of their precious taxes but rather devoid banks of making anymore money off my personal loans lol.

[TheCyclingProgrammer]

I'm glad you've managed to get your head round directors loans but please do run this past your accountant first.

For starters check the HMRC published interest rates, I'm pretty sure you only need to charge 3.25% but be aware this could change.

I'm also not sure you would have to pay a surcharge each year under s455: the entire tax charge would apply to your first CT bill after taking the loan. You wouldn't need to keep paying this each year, but you won't get it back until the initial loan is repaid in full. It's essentially an anti avoidance measure to prevent remuneration disguised as loans but it shouldn't be detrimental for a genuine loan in the long term.

[ndoody]

How does this spread out the tax obligation. That seemed to be your primary objective.
l

No, the primary objective is to pay no more interest to banks for existing loans. And save money by closing down those personal loans and converting them into a company one.

The tax obligation is already spread out in the fact that over the 7 years of limited company I've only taken dividends / salary to roughly meet my and my wifes tax allowance each year. Of course, over and above that, there is year on year excess money building up in the bank. My thinking is I'd like to use some of this excess to pay off my personal loans using some of the ideas above.

I continue to make more than I can actually take out, tax efficiently, so the timing and the idea of paying the corporation tax to get it back again is fine. (if I've understood that idea correctly)

[northernladuk]

I'm not sure NLUK is right about being able to take a "commercial loan" from YourCo (i.e. one that is free from s455 implications) - you're a director so any loan will be treated as such I think.

Bad wording on my part. I meant taking a larger loan and paying the interest rather than staying under the 10k limit and 9 month after year end payback option.

[ASB]

How does this spread out the tax obligation. That seemed to be your primary objective.
l

[ndoody]

As others have pointed out, what you essentially want to do is consolidate your debts into one low-interest loan and you can do that by taking a director's loan and repaying that over a fixed duration, either interest free (and paying the BIK rates if its over £10k) or at HMRC's specified interest rate (3.25% currently I think).

The biggest caveat is the s455 tax so timing is important if you want to give yourself the longest possible amount of time to repay the loan - if you take it at the beginning of your new financial year you'll have 21 months to repay it to avoid a CT surcharge. If you need longer, you'll need to have the cashflow to pay the s455 tax and wait until you can get it back again once you've repaid the loan.

There's nothing essentially wrong with what you want to do but you can't avoid the BIK and s455 issues of a director's loan no matter how you try and dress it up, as Jessica says. But you need to be fully aware of the implications of a director's loan, especially one over £10k. Even at HMRCs specified interest rate, once accounting for the fact that the interest would be taxable profit for YourCo you'd be paying a much lower rate overall. But you need to speak to your accountant.

I'm not sure NLUK is right about being able to take a "commercial loan" from YourCo (i.e. one that is free from s455 implications) - you're a director so any loan will be treated as such I think.

Ahh, finally an answer worth reading...faith in humanity restored, thanks very much

It's actually been a lot of help this answer, I guess I had this idea drummed in me that directors loans were small amounts and had to be repaid to avoid getting nailed for personal tax. I had no idea what s455 tax is, but it gave me a hint to look it up and this article helped me a lot :-

HM Revenue & Customs: Directors' loan accounts and Corporation Tax explained

It made things click in what you were saying to me, oddly just a directors loan article on the hmrc website of all places.

So, I think, the best way for me to do this would be to take a big loan and calculate a fixed term/monthly rate on the total amount and 3.5% APR over the full term. Now if this term was 5 years, then fine...I will pay the CT @25% year on year for 5 years, then on the 6th year I just get all that back. Then there is no BIK to pay further?

There is enough funds to cover the loan + x years of 25% CT. I'm more than happy to pay the interest on the loan, because the interest will be paid into my company and in the long run I will be the beneficiary of this paid interest as opposed to the bank who I currently have personal loans with.

[TheCyclingProgrammer]

As others have pointed out, what you essentially want to do is consolidate your debts into one low-interest loan and you can do that by taking a director's loan and repaying that over a fixed duration, either interest free (and paying the BIK rates if its over £10k) or at HMRC's specified interest rate (3.25% currently I think).

The biggest caveat is the s455 tax so timing is important if you want to give yourself the longest possible amount of time to repay the loan - if you take it at the beginning of your new financial year you'll have 21 months to repay it to avoid a CT surcharge. If you need longer, you'll need to have the cashflow to pay the s455 tax and wait until you can get it back again once you've repaid the loan.

There's nothing essentially wrong with what you want to do but you can't avoid the BIK and s455 issues of a director's loan no matter how you try and dress it up, as Jessica says. But you need to be fully aware of the implications of a director's loan, especially one over £10k. Even at HMRCs specified interest rate, once accounting for the fact that the interest would be taxable profit for YourCo you'd be paying a much lower rate overall. But you need to speak to your accountant.

I'm not sure NLUK is right about being able to take a "commercial loan" from YourCo (i.e. one that is free from s455 implications) - you're a director so any loan will be treated as such I think.

[TheFaQQer]

I know there is a directors loan available to me, as the director, but this is normally talking about interest free and has to be repaid quite quickly.

No it isn't, and no it doesn't.

[Jessica@WhiteFieldTax]

It would become a straight forward directors loan, with s455 and BIK, no matter how it's dressed up.