Reply to: Loan vs dividends

[Lance]

I usually go for loans because they're often easier to understand and typically have better interest rates.

if less than £10k then. As soon as you have to start calculating interest it gets complicated (one reason accountants don't like them IMO).
Unless someone has a director loan interest calculator I've not seen.

[wattaj]

I usually go for loans because they're often easier to understand and typically have better interest rates.

Can you better explain your thinking around this decision?

Dividends are far more straight forward to manage and account for than loans that extend over the company YE + 9 mths IMHO... and I do both where required.

[northernladuk]

I usually go for loans because they're often easier to understand and typically have better interest rates.

Which is totally at odds with what one of our respected accountants has said and has been proven by the raft of people then posting about not fully understanding loans.

How a loan is easier to understand than a dividend is beyond me.

[bmg2g]

I usually go for loans because they're often easier to understand and typically have better interest rates. I needed some money for home stuff once, too. I used <mod snip> a bunch of scammers who edit posts to add links to fraudulent companies</mod snip>. It was easy because I just used my phone, and there was no complicated paperwork. Everything was quick and easy to understand. They showed me different loan choices and clearly stated how much I'd have to pay back and when.

[wattaj]

I never knew that S.455 payments were reclaimable. I thought is was a totally punitive charge.

There is a lag in the return of the funds so there will be an "opportunity cost", but it is repaid.

[northernladuk]

I never knew that S.455 payments were reclaimable. I thought is was a totally punitive charge.

https://www.oneaccounting.co.uk/news...s-loan-repaid/

[Lance]

As per Maslins reply above, loans are NOT something to be entered into lightly, or without having done sufficient research (Beneficial Loans). I have arranged a number of such loans over the years, but I have been bitten once when the beneficiary did not repay the full amount. That amount had to be written off in the accounts and still annoys me. Still, lesson learned.

I am currently running such a loan and expect it to run for about 3 to 4 years. I will pay the S.455 charge when it becomes due and then reclaim that amount when the loan is fully repaid... there will be a delay in receiving this repayment, but the saving in interest payments makes this arrangement worthwhile.

This works for me. It might not work for you. Check with your accountant and DO NOT start the process without having done so.

I never knew that S.455 payments were reclaimable. I thought is was a totally punitive charge.

[wattaj]

Couldn't find exactly what I was looking for in the forums so don't shoot me down if I missed it.

I have a number of home improvements that need undertaking on my two properties. I was planning on funding these by payment of dividends, but there are two downsides:

1. 8.75% interest on dividends (basic rate)
2. 33.75% higher rate tax would be breached

So I got to thinking, wouldn't it be a smarter move to draw up a commercial/beneficial loan from my Ltd company to myself, giving:

1. A much lower rate, think it's around 2.5% currently
2. A longer payment schedule
3. The ability to take more dividends for 'other purposes'

Also, would the loan to me, lower the company's Corporation Tax liability?

Seems like a no-brainer here. What am I missing?

Thanks

As per Maslins reply above, loans are NOT something to be entered into lightly, or without having done sufficient research (Beneficial Loans). I have arranged a number of such loans over the years, but I have been bitten once when the beneficiary did not repay the full amount. That amount had to be written off in the accounts and still annoys me. Still, lesson learned.

I am currently running such a loan and expect it to run for about 3 to 4 years. I will pay the S.455 charge when it becomes due and then reclaim that amount when the loan is fully repaid... there will be a delay in receiving this repayment, but the saving in interest payments makes this arrangement worthwhile.

This works for me. It might not work for you. Check with your accountant and DO NOT start the process without having done so.

[wattaj]

but that's in the past. So what will it be for this year??? I'd guess 6%, but plan on base rate as the minimum.

The official rate for 2023 is 2.25% as per the link above.

[Lance]

HMRC beneficial Rates are here https://www.gov.uk/government/public...official-rates

but that's in the past. So what will it be for this year??? I'd guess 6%, but plan on base rate as the minimum.

[Andy Hallett]

HMRC beneficial Rates are here https://www.gov.uk/government/public...official-rates

[Lance]

Doesn't the loan interest rate need to be a commercial rate? 2.5% was a commercial rate 2 years ago, no chance it still is.

I believe it has to be at least the same as the base rate. I'll let my accountant worry about it. Still better off as profit in my CO than profit in a bank

[JustKeepSwimming]

Doesn't the loan interest rate need to be a commercial rate? 2.5% was a commercial rate 2 years ago, no chance it still is.

[Lance]

I have recently taken a large chunk of cash as DLA to offset my mortgage. That will be paid back 8 months after year end. And taken out again 6 weeks later. I don't need to leave such a large gap, but I don't want to leave it to the last minute and find that limits/secuiryt/other gets in the way. If done a few weeks in advance then no sweating about it.

[Maslins]

Two separate things:

- interest - this does have the £10k threshold. Loans below that, no interest needs to be paid. Loans above that you need to pay your company interest, or suffer a taxable benefit in kind on the interest you should've paid. This applies regardless of how long the loan was for (though in practice if it was only a few days it'll probably be ignored for pragmatic reasons).

- S.455 - there's no de minimis for this in terms of amount (though as above, for pragmatic reasons a long term £1 loan would likely be ignored). If you take a loan, and don't repay it by your company's year end, it needs declaring on the CT return. If it's still not repaid by 9 months after the year end, additional tax is due based on the amount not cleared.

IE big long term loans suffer both. Small long term loans suffer S.455 only. Big short term loans suffer interest only. Small short term loans suffer neither.