Reply to: Startup money into a company - Director's Loan the only option?

[Paralytic]

I wasn't sure these days if you could (officially) loan money to your mate without having to go through money laundering and fraud checks

[d000hg]

...

Nicely explained, thanks. I wasn't sure these days if you could (officially) loan money to your mate without having to go through money laundering and fraud checks but I think that's cleared up:

When you do decide that the company should start paying interest on the loan which can be 9 months later if you wish, that is when you should tell Hector that you need to fill in a form CT61. The deadlines for filing these is strict, each quarter and late submissions may generate penalties. It's just a form filing exercise and when you've done it once, it's fairly straight forward. The loan and interest charged doesn't have to be formalised but may need to be noted in the year end accounts under the balance sheet notes. I'd wouldn't recommend changing the interest rate often but if you have a valid motive for doing so and can argue the case, then I can't see why you could increase the rate 6 months later. To keep it simple, perhaps, when you decide you're going to charge the company interest is to set it at say 10% compounded. Keep a little spreadsheet which is formulated and roll the numbers forward.

So basically it can be totally arbitrary but only really altered quarterly, and for good reason. If I would like to charge interest from day 1 but defer payments until the company is paying me money that isn't the money I lent, that sounds like it is trivial too. I'm not sure if that really makes much sense to do without re-reading the replies above again

[Craig@Clarity]

Interesting, Craig especially (we can ignore that Lance embarrassed themself and tried to back out )

So a DL has no tax implications if it does not charge interest, interest may be charged and this would be a cost to the Ltd (CT relief effectively) but would attract personal income tax past the allowance on tax-free interest - did I get that all right?

Spot on. Don't let the numbers scare you. Same principal if it was a £100 loaned to the company for a month. You loan it to the company. The company shows it as a "Directors Current Account" of £100. The company has the funds to pay you back a month later, done. Don't need to account for it on your personal tax return or have an effect on the company's profit and loss. If you decide to charge the company interest on the £50k loan, then yes, that interest is treated as interest income on your personal tax return (regardless of whether the company physically pays it to you or credits it to your "Directors Current Account"). You should declare all your interest on your personal tax return and then deduct the personal savings allowance of either £1k or £500.

Oh and I say Directors Current Account from a technical accounting point of view to mean the company owes you money. A Directors Loan Account is where you owe the company money. The number bods will know what I'm on about!

A DL does not count as a loss to the company, or does it? e.g. if it pays back a chunk of DL does that count as a loss affecting CT?

It doesn't. If you loaned the company £50k and the company repaid £10k back to you, that transaction gets netted off against the loan balance i.e. £50k - £10k = £40k. The accounting transaction would be a credit to the bank account nominal and a debit to the directors current account (or DL for your understanding).

You mentioned CT61 which is something I'd get the accountant to do, but my query here is how flexible is all this? When doing a DL to the company, does this have to be formalised officially or just noted as such in the books?
In terms of repayment, I understand no formal loan arrangement has to be made, the company can pay it back as and when it decides?
In terms of interest, would that have to be decided at the start, or can I loan £50k and 9 months later decide the company should start paying interest at 3%, then another 6 months later decide the rate is now 5%? THat seems all a bit lax from financial regulations standpoint, which are so strict these days.

When you do decide that the company should start paying interest on the loan which can be 9 months later if you wish, that is when you should tell Hector that you need to fill in a form CT61. The deadlines for filing these is strict, each quarter and late submissions may generate penalties. It's just a form filing exercise and when you've done it once, it's fairly straight forward. The loan and interest charged doesn't have to be formalised but may need to be noted in the year end accounts under the balance sheet notes. I'd wouldn't recommend changing the interest rate often but if you have a valid motive for doing so and can argue the case, then I can't see why you could increase the rate 6 months later. To keep it simple, perhaps, when you decide you're going to charge the company interest is to set it at say 10% compounded. Keep a little spreadsheet which is formulated and roll the numbers forward.

[Craig@Clarity]

I really think this thread could have stopped at post #2

https://www.contractoruk.com/forums/...ml#post2679082

Kinda, although the interest doesn't have to be at the "market rate" since it's an unsecured loan.

[Craig@Clarity]

How so?

lol

[Paralytic]

I really think this thread could have stopped at post #2

https://www.contractoruk.com/forums/...ml#post2679082

[WordIsBond]

Since You and YourCo are two different entities for tax purposes, let's split them.

YourCo

Just drop one word (director) for a minute and talk about a loan. If YourCo gets a loan from the bank, it's not income, it is neither profit nor loss. You have an asset (the money) and a liability. If you spend that money on something, that's a loss, if you make profit to earn it back that's a gain, but the loan itself is not expense, income, or profit/loss.

If YourCo pays money back to the bank, that's not expense, profit, or loss, either. An asset (the cash) is going away, but so is a liability (the loan).

If YourCo pays interest to the bank (and it surely will), that's an expense, which could mean you have a loss for the year, depending on other income/expenses.

For the most part, when loaning money to your company, it won't matter to the company whether the loan was from you or from a bank. It's still creating an asset for the company (the cash) and a liability (the loan). It's still using an asset to cancel a liability when you pay it off. There's some extra reporting but mostly that's it.

You

Now, let's talk about you making a loan. It's not to your company, it's to your mate. When you loan it to him it isn't income for either of you, it's a loan. When he pays it back, it's not income for either of you, it's just a loan payback. If he pays you interest, that's interest income which you legally should report on your SA. If you have less interest than the interest allowance you won't pay any tax on it. If he pays you £50K in interest, you'll pay tax till the pips squeak.

Other than some reporting, in this case, YourCo is your mate. The loan is not relevant to your taxes. It doesn't matter when you make the loan or when you get it back. The interest is relevant, if you are paid enough.

It's much more complicated when YourCo loans you money, there are some important rules that could cost you a lot if you mess up. But when you loan it money, it's pretty simple.

If you are a basic rate taxpayer, you can have £1000 interest tax free, £500 for higher rate. If you loan YourCo £50K, £1000 is 2%. Even if the loan is only £25K, that's 4% for an unsecured loan, hardly excessive. If YourCo does not pay you that interest, it will have to pay 19% Corporation Tax on the profit, leaving £810, then you will have to pay dividend tax on it when you take it out, so another £60 or so, leaving you around £750. From a strictly financial perspective, you are saving £250 a year in tax by paying yourself £1K interest a year on your loan.

Obviously, you should check everything with a good accountant....

[Lance]

1. If they'd made £50k profit on top of the £50k original invested, the shares would be worth twice as much.

If you mean that there is now £100k in the company then yes. Twice as much (assuming no other creditors).

[Lance]

Interesting, Craig especially (we can ignore that Lance embarrassed themself and tried to back out )

How so?

[d000hg]

Interesting, Craig especially (we can ignore that Lance embarrassed themself and tried to back out )

So a DL has no tax implications if it does not charge interest, interest may be charged and this would be a cost to the Ltd (CT relief effectively) but would attract personal income tax past the allowance on tax-free interest - did I get that all right?

A DL does not count as a loss to the company, or does it? e.g. if it pays back a chunk of DL does that count as a loss affecting CT?

You mentioned CT61 which is something I'd get the accountant to do, but my query here is how flexible is all this? When doing a DL to the company, does this have to be formalised officially or just noted as such in the books?
In terms of repayment, I understand no formal loan arrangement has to be made, the company can pay it back as and when it decides?
In terms of interest, would that have to be decided at the start, or can I loan £50k and 9 months later decide the company should start paying interest at 3%, then another 6 months later decide the rate is now 5%? THat seems all a bit lax from financial regulations standpoint, which are so strict these days.

[Maslins]

2. This dodgy catch-all can't be the only thing stopping such share buy backs, surely?

Correct. You can't just sell 1 share each year back to the company for an amount equal to the annual exemption, so a tax free capital gain. I've forgotten the precise rules, but key things is the ownership needs to change. Ie if today you own 100 of 100 shares, you own 100%. If you then sell one back to the company, so now you own 99 of 99 shares, you still own 100%. If you can be bothered and want to learn more, Google something like "HMRC tax POOS" (yes, snigger, it stands for Purchase Of Own Shares)...but short answer is your idea doesn't work.

[ittony]

1. If the share buy back is at the same value there is no gain to tax.
2. Google GAAR

1. If they'd made £50k profit on top of the £50k original invested, the shares would be worth twice as much.

2. This dodgy catch-all can't be the only thing stopping such share buy backs, surely?

[WordIsBond]

The directors loan would be unsecured which means you can charge the company interest at a higher rate if you wish. So charging the company interest isn't necessarily a bad thing. If you can handle the admin of registering and filing a CT61 form to HMRC each quarter, either crediting your loan account with the interest or physically paying yourself the interest and have the company deduct 20% tax on the interest and pay it over to HMRC, then it may be worthwhile.

This. It's whether the hassle of dealing with it is worth it to you. Which may partly depend on how long it takes the company to pay you back. If this loan is going to last several years, the interest (and the tax savings that comes with it) adds up, and the admin is easy once you've done it and know what to do. On the other hand, if the loan will be paid off in less than a year, it may not be worth it.

[Lance]

Presumably the company could buy some of its shares back from you to return some of the startup capital. Although - capital gains tax.

Come to think of it, why isn't my own limited company buying some of it shares back from me each year, up to my CGT allowance? Why isn't that a thing?

1. If the share buy back is at the same value there is no gain to tax.
2. Google GAAR

[Craig@Clarity]

When starting a new business and there are some up-front costs, directors/owners typically put a chunk of their own cash (or somebody else's) into the company.

Say you were doing this and needed £50k of your personal savings to get things running, and cover costs until you were break-even. You would want to get that £50k back and you would rather not be taxed on it when you do.
What are the normal ways to do this?

The simplest process here without any tax consequence would be to loan the company £50k as a directors loan. When the company has sufficient cash flow to repay you back in tranches or in full, you simple take it back and there is no CT or personal tax issues.

I'm aware of the Director's Loan option, which even allows interest to be charged though I'm not sure if charging yourself interest is particularly sensible?

The directors loan would be unsecured which means you can charge the company interest at a higher rate if you wish. So charging the company interest isn't necessarily a bad thing. If you can handle the admin of registering and filing a CT61 form to HMRC each quarter, either crediting your loan account with the interest or physically paying yourself the interest and have the company deduct 20% tax on the interest and pay it over to HMRC, then it may be worthwhile.

You'd have to look at your personal income situation and crunch some numbers as the interest could be covered by the personal savings allowance. The gross interest is deductible in the company accounts so you save 19% CT too. If you have an accountant, have a chat with them and get them to work through some numbers e.g. if you decided to charge the company 10% interest per annum then what would the overall tax saving be. If you're a basic rate tax payer then you'll find you're better off by £150. Now you're thinking, is it worth a tax saving of £150 for the hassle of completing the admin and potentially getting fined for not filing a CT61 on time each quarter? The answer is yes because the company doesn't just owe you the initial £50k.
It owes you the £4k interest it's been charged which has either been physically paid to you or it's credited to your loan account for withdrawal later.

What other options exist? I suppose you could value your shares at £1000 each at incorporation rather than a more typical £1 but that cost is then locked into the company, right?

If you didn't care about tax efficiency, can you just "gift" the money to the company? Obviously HMRC can get a bit twitchy about people making big transactions between personal/company accounts.

You could value the shares at a greater amount than £1 but the you lock it in. Probably overthinking it?....