Reply to: Director's Loan vs Extra dividend with tax

[Forbes Young]

You can also repay your loan by not paying back expenses, which may or may not help avoiding the higher tax band

Yes that's right, as what is due to a director from the company and vice-versa is credited/debited to the directors account. This includes a payroll the company runs for the director - the net amount owing is technically credited to the directors account until the director actually takes the funds out of the company.

Graeme Bennett ACMA MBA

[Eirikur]

You can also repay your loan by not paying back expenses, which may or may not help avoiding the higher tax band

[TheCyclingProgrammer]

Reduce what you owe your company to £5,000 or less no later than nine months after the end of the accounting period. But do this by taking extra salary, a bonus, etc. or dividend which is credited against the debt rather than being paid out to you. In these circumstances if you re-borrow the money HMRC accepts that this won’t trigger the new anti-avoidance rules.

If the amount you owe your company at the end of an accounting period is greater than £5,000, repay this within nine months to reduce the 25% tax charge, but leave it more than 30 days before you borrow more from your company.
If you repay a loan of £5,000 or more to your company and re-borrow within 30 days, the tax charge, equal to 25% of the borrowing, will apply. But where you reduce the debt by crediting a dividend or a bonus against it within nine months of your company’s accounting period, the re-borrowing won’t result in a tax charge.

If you repay a loan of £5,000 or more to your company and re-borrow within 30 days, the tax charge, equal to 25% of the borrowing, will apply. But where you reduce the debt by crediting a dividend or a bonus against it within nine months of your company’s accounting period, the re-borrowing won’t result in a tax charge

There's so many things wrong or misleading in this post, its quite worrying.

* There is no limit as far as the s455 tax charge for outstanding loans to participators. The s455 tax applies if any loan remains unpaid 9 months after the year end. Reducing this to "under £5k" might reduce the amount of s455 tax due but it doesn't mitigate it and you won't get it back until 9 months after the end of the year in which the loan was repaid. I'm confused as to why you seem to be conflating the BIK limit with the s455 tax charge.

* There is a limit below which no interest needs to be charged and the loan is not considered a BIK. This used to be £5k, but has been £10k since last year.

* The 30 day rule only applies to loans under £15k. Loans less than this can be repaid and taken again after 30 days without the s455 tax charge kicking in.

* For loans greater than £15k, the 30 day rule is ignored; the "intentions and arrangements" rule is applied instead which in practice means, if it looks like a continuation of a previous loan, HMRC will treat it as such regardless and the s455 tax charge will still apply.

Here's an excellent guide to all you need to know about director loans:
http://www.rossmartin.co.uk/companie...ccount-toolkit

[Forbes Young]

I think you know it is...

Indeed I do ;-)

Graeme Bennett ACMA MBA

[jamesbrown]

Is it not £10,000 now?

I think you know it is...

[Forbes Young]

Reduce what you owe your company to £5,000 or less no later than nine months after the end of the accounting period. But do this by taking extra salary, a bonus, etc. or dividend which is credited against the debt rather than being paid out to you. In these circumstances if you re-borrow the money HMRC accepts that this won’t trigger the new anti-avoidance rules.

If the amount you owe your company at the end of an accounting period is greater than £5,000, repay this within nine months to reduce the 25% tax charge, but leave it more than 30 days before you borrow more from your company.
If you repay a loan of £5,000 or more to your company and re-borrow within 30 days, the tax charge, equal to 25% of the borrowing, will apply. But where you reduce the debt by crediting a dividend or a bonus against it within nine months of your company’s accounting period, the re-borrowing won’t result in a tax charge.

If you repay a loan of £5,000 or more to your company and re-borrow within 30 days, the tax charge, equal to 25% of the borrowing, will apply. But where you reduce the debt by crediting a dividend or a bonus against it within nine months of your company’s accounting period, the re-borrowing won’t result in a tax charge

Regards
Abbas Shah

Hallam Jones Accountancy

Is it not £10,000 now?

[Hallam Jones Accounting]

Reduce what you owe your company to £5,000 or less no later than nine months after the end of the accounting period. But do this by taking extra salary, a bonus, etc. or dividend which is credited against the debt rather than being paid out to you. In these circumstances if you re-borrow the money HMRC accepts that this won’t trigger the new anti-avoidance rules.

If the amount you owe your company at the end of an accounting period is greater than £5,000, repay this within nine months to reduce the 25% tax charge, but leave it more than 30 days before you borrow more from your company.
If you repay a loan of £5,000 or more to your company and re-borrow within 30 days, the tax charge, equal to 25% of the borrowing, will apply. But where you reduce the debt by crediting a dividend or a bonus against it within nine months of your company’s accounting period, the re-borrowing won’t result in a tax charge.

If you repay a loan of £5,000 or more to your company and re-borrow within 30 days, the tax charge, equal to 25% of the borrowing, will apply. But where you reduce the debt by crediting a dividend or a bonus against it within nine months of your company’s accounting period, the re-borrowing won’t result in a tax charge

Regards
Abbas Shah

Hallam Jones Accountancy

[Forbes Young]

I've never been a great fan of directors loans.

I've sat in seminars with eminent tax bods, "A tax deferred is a tax saved", and whilst that makes sense on paper, in practice my experience has been that unless there is something exceptional, eg feast this year with imminent famine next year, then it's better to take the tax hit, have a dividend,mand know where you are.

Sometimes simplicity isn't fashionable though.

I agree Jessica to your sentiments but the "facility" is there for an emergency "one-off" in special circumstances. At the end of the day, it's a loan that has to be repaid at some stage.

Graeme Bennett ACMA MBA

[Maslins]

I've never been a great fan of directors loans.

I've sat in seminars with eminent tax bods, "A tax deferred is a tax saved", and whilst that makes sense on paper, in practice my experience has been that unless there is something exceptional, eg feast this year with imminent famine next year, then it's better to take the tax hit, have a dividend,mand know where you are.

Sometimes simplicity isn't fashionable though.

Agree 100%.

[Jessica@WhiteFieldTax]

I've never been a great fan of directors loans.

I've sat in seminars with eminent tax bods, "A tax deferred is a tax saved", and whilst that makes sense on paper, in practice my experience has been that unless there is something exceptional, eg feast this year with imminent famine next year, then it's better to take the tax hit, have a dividend,mand know where you are.

Sometimes simplicity isn't fashionable though.

[jaseerabubakar]

Is there a question in there?

The point of a Director's loan, when used in this way, is to defer/avoid higher rate tax, but many contractors will fail to achieve this in practice, because they need a higher-rate dividend to pay back the loan.

The point of taking the money later is to defer/avoid higher rate tax to a time when your income is lower. You're wrong about the CGT rate on the capital distribution if Entrepreneurs Relief applies (assuming you wind-up the company formally).

So, what is your question exactly? Or to put it differently, how can we possibly know what makes sense in your case?

My question was which would be the best way if I actually needed the money to be kept. As the 'TheCyclingProgrammer' said, the DL only helps if I need the money temporarily. If I need the money to be kept, I just need to take the extra tax hit. That makes sense to me. I got my answer

Thanks for all the responses.

[TheFaQQer]

I think I read somewhere that blatent B&B is being clamped down on,
see this:
https://www.accountancylive.com/deal...-loan-accounts

Yes, I have mentioned that in the past to him

How he thinks having a 50k loan and paying interest on it and then paying it back with a dividend each year makes sens, I cannot fathom.

[TheCyclingProgrammer]

I think I read somewhere that blatent B&B is being clamped down on,
see this:
https://www.accountancylive.com/deal...-loan-accounts

The rules were tightened and made more explicit; in short if the loan is under £15k and you have a gap of 30 days between repaying the loan and taking a new one then it isn't caught by the new rules. If it's over £15k then the number of days is irrelevant and HMRC will take a high level view of the arrangement and your intentions.

[Platypus]

As others have said - you've got to repay it, so how does it help you?

A colleague of mine bed and breakfasts his every year and repays with a dividend - I keep saying how daft that is, but once you start down that road, I can't see how you can ever repay it without taking a hit.

I think I read somewhere that blatent B&B is being clamped down on,
see this:
https://www.accountancylive.com/deal...-loan-accounts

[TheFaQQer]

As others have said - you've got to repay it, so how does it help you?

A colleague of mine bed and breakfasts his every year and repays with a dividend - I keep saying how daft that is, but once you start down that road, I can't see how you can ever repay it without taking a hit.