Reply to: Surplus cash

[northernladuk]

Would he tell the lender he's borrowing for the deposit from another source? They might not like that....

Absolutely this.

At the very least they'll count the loan against his affordability but I'd be inclined to think they'll just flat refuse on the basis the deposit is a loan.

[WordIsBond]

It's to buy a property, and money is to go towards a deposit. His alternative would be put down a smaller deposit and borrow more, but that's a different story.

Would he tell the lender he's borrowing for the deposit from another source? They might not like that....

[WordIsBond]

My accountant is unsure around regulatory side of lending through Ltd co.

My company lends money to a bank all the time, and they pay interest to MyCo. It's commonly called a savings account. As long as the money isn't going to you personally or anyone connected to you (in legal terms) and a reasonable rate of interest is charged, why would there be any issue? If you start giving out interest free loans someone might query it. If you start forgiving loans and then issuing new ones to the same person, someone might say this is actually a dividend.

As to whether you should do it, it depends on how much you trust the person, how willing you are to lose the money and if you care about the person enough to just lose the money if he can't pay it, and how much you are willing to risk the relationship. Because if he struggles to pay it back you risk the relationship even if it doesn't bother you -- it will bother him and can mess up your relationship with him. Don't necessarily take the word of all the doomsayers, it may be worth it to you personally within this friendship, but there's a reason for so much doomsaying. Just weigh the risks and benefits both as to the likelihood of each one and the impact if it does happen, and make your decision.

But there's no reason you can't do this. From a company perspective, it's an investment -- riskier than a bank savings account, but not substantively very different as far as how you'd account for it.

(I am not an accountant)

[TheCyclingProgrammer]

Directors loan, I believe also have to be repaid in 9(?) months but this loan might go on for around couple of years. My accountant was also not too keen on this.

It doesn't *have* to be repaid in that timeframe, so long as you are aware of and have the cashflow to pay the extra s455 corporation tax, which will become repayable to YourCo once the loan has been repaid.

But you'd also have to pay YourCo interest or the loan will be treated as a BIK.

[SandyD]

Take a director loan for 2 years, calculate how much extra you need to pay (interest/ BIK etc) then add that amount to the expected repayment from your friend. If not all the extra that the loan that would cost you, you could share some of the cost... explain to your friend the consequences and why the loan of X will cost you X+Y, he may be Ok with paying you the extra Y.... just do it, not the end of the world

[simes]

Newly educated to some of this, I would also advise not.

Not to disparage a friendship, or the need to return a favour, but because of the loan issue.

You're a month and a half away from a new FY... If you're dead set on making this loan to him, can you not wait until you have a new year from which to take dividends? It will then be a personal loan and you will not be exposed to ongoing LtdCo related tax issues.

This of course minimises the dividends open to you for 19/20...

Good luck.

[ubuntu83]

You could take out a directors loan (to yourself) then lend him the money personally - then you wouldn't have to deal with the intricacies of your company being the lender

Definitely wouldn't advocate it though, is there a specific reason your friend needs a 5 figure loan but can't get one from a bank or remortgage?

It's to buy a property, and money is to go towards a deposit. His alternative would be put down a smaller deposit and borrow more, but that's a different story. I did like to return his favour if I could (via my company if possible).

Directors loan, I believe also have to be repaid in 9(?) months but this loan might go on for around couple of years. My accountant was also not too keen on this.

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[pr1]

Thanks - genuine advice truly..
The person in question here has helped me out in past multiple times and with similar amounts of money when I needed to purchase my house. So we have had dealings in past at a personal level. Sure, that doesn't guarantee anything - I totally get it. I just don't have enough savings at the moment due to expected expenses... and I have maxed out my dividends. Extracting any more will put me into a higher tax bracket and therefore very expensive...
So, aside from trust issues - I am keen to understand the legal and accounting consequences. My accountant is unsure around regulatory side of lending through Ltd co.

Thanks again

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You could take out a directors loan (to yourself) then lend him the money personally - then you wouldn't have to deal with the intricacies of your company being the lender

Definitely wouldn't advocate it though, is there a specific reason your friend needs a 5 figure loan but can't get one from a bank or remortgage?

[northernladuk]

Thanks - genuine advice truly..
The person in question here has helped me out in past multiple times and with similar amounts of money when I needed to purchase my house. So we have had dealings in past at a personal level. Sure, that doesn't guarantee anything - I totally get it. I just don't have enough savings at the moment due to expected expenses... and I have maxed out my dividends. Extracting any more will put me into a higher tax bracket and therefore very expensive...
So, aside from trust issues - I am keen to understand the legal and accounting consequences. My accountant is unsure around regulatory side of lending through Ltd co.

Thanks again

Sent from my SM-G935F using Contractor UK Forum mobile app

And you think a bunch of contractors will know? You might want to try accoutingweb instead.

[ubuntu83]

Thanks - genuine advice truly..
The person in question here has helped me out in past multiple times and with similar amounts of money when I needed to purchase my house. So we have had dealings in past at a personal level. Sure, that doesn't guarantee anything - I totally get it. I just don't have enough savings at the moment due to expected expenses... and I have maxed out my dividends. Extracting any more will put me into a higher tax bracket and therefore very expensive...
So, aside from trust issues - I am keen to understand the legal and accounting consequences. My accountant is unsure around regulatory side of lending through Ltd co.

Thanks again

Sent from my SM-G935F using Contractor UK Forum mobile app

[WTFH]

A wise man once said: If you lend a friend £20 and never see them again, it was worth it.

[northernladuk]

Great post, and equally fitting responses and info here! so, thank you all!

I did like to know if it would be possible to loan some of the surplus cash to an unrelated individual? By unrelated I mean, friend known for a few years and trustworthy but nothing to do with the Ltd Co. The cash is reserves from previous years, after corporation tax paid etc - essentially being eaten away by inflation practically and fixed savings rates for anything under 3 years seems pretty lame.

Amount probably be in 5 digits.. so not tiny in terms of risk. I did like some feedback on:-
1. Firstly, is it possible to do this at all for Ltd Co IT contractor.
If Yes,
2. Are there any regulatory requirements, permissions, authorization, types hoops to get through? Any other restrictions to be mindful of, e.g. amount, terms of repayments etc?
3. Accounts & Tax - What does it mean in terms of the accounts and tax treatment? Long term creditor?
4. Documents - If there are contracts, t & c's to agreed or paperwork should be put in place before lending the cash?
5. Business justification - Should interest be charged to justify benefit? although, the loan is towards helping a friend
6. Worst case - what if doesn't get repaid?

Thank you in advance!

Just the fact you know so little about it means you should stay away. Also money and friends don't mix. You might think you trust someone but when 5 figure sums are flying around you'd be surprised how quickly that trust disappears.

Truly awful idea.

[pr1]

Great post, and equally fitting responses and info here! so, thank you all!

I did like to know if it would be possible to loan some of the surplus cash to an unrelated individual? By unrelated I mean, friend known for a few years and trustworthy but nothing to do with the Ltd Co. The cash is reserves from previous years, after corporation tax paid etc - essentially being eaten away by inflation practically and fixed savings rates for anything under 3 years seems pretty lame.

Amount probably be in 5 digits.. so not tiny in terms of risk. I did like some feedback on:-
1. Firstly, is it possible to do this at all for Ltd Co IT contractor.
If Yes,
2. Are there any regulatory requirements, permissions, authorization, types hoops to get through? Any other restrictions to be mindful of, e.g. amount, terms of repayments etc?
3. Accounts & Tax - What does it mean in terms of the accounts and tax treatment? Long term creditor?
4. Documents - If there are contracts, t & c's to agreed or paperwork should be put in place before lending the cash?
5. Business justification - Should interest be charged to justify benefit? although, the loan is towards helping a friend
6. Worst case - what if doesn't get repaid?

Thank you in advance!

Sound plan, can't see anything going wrong with that...


...don't do it

[ubuntu83]

Loan to individual

Great post, and equally fitting responses and info here! so, thank you all!

I did like to know if it would be possible to loan some of the surplus cash to an unrelated individual? By unrelated I mean, friend known for a few years and trustworthy but nothing to do with the Ltd Co. The cash is reserves from previous years, after corporation tax paid etc - essentially being eaten away by inflation practically and fixed savings rates for anything under 3 years seems pretty lame.

Amount probably be in 5 digits.. so not tiny in terms of risk. I did like some feedback on:-
1. Firstly, is it possible to do this at all for Ltd Co IT contractor.
If Yes,
2. Are there any regulatory requirements, permissions, authorization, types hoops to get through? Any other restrictions to be mindful of, e.g. amount, terms of repayments etc?
3. Accounts & Tax - What does it mean in terms of the accounts and tax treatment? Long term creditor?
4. Documents - If there are contracts, t & c's to agreed or paperwork should be put in place before lending the cash?
5. Business justification - Should interest be charged to justify benefit? although, the loan is towards helping a friend
6. Worst case - what if doesn't get repaid?

Thank you in advance!

[gizzmo]

There is a page on their loss protection here.
Default Shield Protection | Growth Street

Now I've read it it's actually different to FC. They don't have a protection pot.

Default rates are here
Investing statistics | Growth Street

If you scroll to the bottom it talks about the loss provision pot. I don't have the time to look though it but where is the 1/2 million a year the founders put in coming from? The losses last year exceeded the pot by quite a bit so you'd imagine it's going to grow inline with the growth in lending and percentage default expected. Someone must be losing out if it needs topping up by half a mill a year.

But on the whole you are right, no lender has lost out yet. FC works by your gross interest being up in the 9-10% but you shoulder the losses so returns are around 5%.

Thanks, will do. Appreciate you taking the time and pointing me in the right direction.