Reply to: Company Reserves.

[THEPUMA]

I just happened across an article related to this http://news.bbc.co.uk/1/hi/business/7482914.stm
"This only counts for a net deposit, so if you had £50,000 deposited but also had a £20,000 loan with the same bank, then only £30,000 would be compensated."

Does this weaken your standpoint somewhat?

Not if the loan and the deposit are automatically netted off. This being the case, the point being made is moot as no protection is necessary. If I were doing it, I would be checking the T&Cs of the mortgage contract carefully.

[Olly]

The justification is that the security of your deposit is improved. It is unlikely that your bank/lender will call in your mortgage whilst not repaying your bank deposit. I think in some cases they are obligated to "net off". From memory this depends whether the lender is a bank or building society.
PUMA

I just happened across an article related to this http://news.bbc.co.uk/1/hi/business/7482914.stm
"This only counts for a net deposit, so if you had £50,000 deposited but also had a £20,000 loan with the same bank, then only £30,000 would be compensated."

Does this weaken your standpoint somewhat?

[Olly]

I just looked and the Scottish Widows 2% headline rate includes 0.5% bonus rate which you only get as a new customer for 6 months (plus you need >£50K to get that rate). So it is really only 1.25% for <£50K and 1.5% for >£50K. Assuming you see this as more than a six month thing.

bugger - didn't spot it was a 6month thingy .....took me about that long to drag my lazy ass and open the account having first heard about it!!

should have just gone for that one that does the average (though not sure I trust them with my bucks, they don't look too substantial)

[Lewis]

I just looked and the Scottish Widows 2% headline rate includes 0.5% bonus rate which you only get as a new customer for 6 months (plus you need >£50K to get that rate). So it is really only 1.25% for <£50K and 1.5% for >£50K. Assuming you see this as more than a six month thing.

[THEPUMA]

2.79% offset mortgage (at the mo and likely to stay low for a while)
s419 isn't a factor - we're comparing leaving money in company or using it the way you suggest. There is no further tax on dividends as I never go into the 40% band.

2% interest from Scottish widows taxed at 21% = 1.58% interest (I think)
2.79 - 1.58 = 1.21% saving
er...it might be 2.89% actually - can't remember now

If the assurances are unobtainable then I speculate that's the reason why practically no one else is doing this....shame...you had me going there for a bit.
Perhaps you know of a case where it was successfully defended after being challenged?

OK in your circumstances the figures are almost correct. There is effectively an additional ultimate extraction cost on the 1.58%. This will depend on your circumstances but is likely to be between nil (if your surplus earnings can be distributed as capital within the capital gains tax annual exemption) and 25%. This structure is obviously substantially more beneficial for those that need to extract more than the higher rate threshold to finance long-term mortgage repayments or personal property investments.

Whether the assurances being unobtainable puts people off I don't know. I do know that many people rely on professional advice in respect of their IR35 status rather than asking HMRC for an opinion.

I don't know of a case where it has been challenged, successfully or otherwise.

PUMA

[THEPUMA]

"unlikley" it's words like that that strike fear in me
....I have no idea of banking law - sometimes it appears there aren't really any when banks go bust

Maybe they'd even freeze the current account balance in light of the loan

"unlikely" is also a worrying word

Fair enough but you are no worse off than having it on deposit elsewhere.

[Olly]

I think the saving is higher than that. You are also avoiding the s419 charge or tax on dividends assuming you need the money for the longer term.

I suspect you are unlikely to get the level of reassurance you are after, so if that is a deal-breaker, it probably isn't for you.

2.79% offset mortgage (at the mo and likely to stay low for a while)
s419 isn't a factor - we're comparing leaving money in company or using it the way you suggest. There is no further tax on dividends as I never go into the 40% band.

2% interest from Scottish widows taxed at 21% = 1.58% interest (I think)
2.79 - 1.58 = 1.21% saving
er...it might be 2.89% actually - can't remember now

If the assurances are unobtainable then I speculate that's the reason why practically no one else is doing this....shame...you had me going there for a bit.
Perhaps you know of a case where it was successfully defended after being challenged?

[Olly]

"unlikley" it's words like that that strike fear in me
....I have no idea of banking law - sometimes it appears there aren't really any when banks go bust

Maybe they'd even freeze the current account balance in light of the loan

"unlikely" is also a worrying word

[THEPUMA]

Just thought of something else - exactly how is it more secure?
The money is going in a run of the mill current account at First Direct with govs 50K protection limit so argument only works up to that value and if the balance in corporate account exceeds 100K (isn't it?). Equally you could open multiple accounts in co. name.....

Because it is offset against money you owe them so it is unlikely that they will call in the debt you owe them whilst not repaying the money they owe you.

[Olly]

Just thought of something else - exactly how is it more secure?
The money is going in a run of the mill current account at First Direct with govs 50K protection limit so argument only works up to that value and if the balance in corporate account exceeds 100K (isn't it?). Equally you could open multiple accounts in co. name.....

[THEPUMA]

OK...I'm all up for digging deeper. Though the saving is pretty small at around 1.21% (assuming all company profits extracted without tax over and above 21% CT).

For me, the real key thing would be a written letter agreeing to the process by someone who enforces the rules and has the authority to make such a statement.

As I mentioned before, if this is such an ideal solution then why don't we all immediately do it, especially as offset interest rates are pretty darn competitive. I'd imagine it's because such proof from tax authorities doesn't exist and you yourself say HMRC are likely to say it's a no go.

I think the saving is higher than that. You are also avoiding the s419 charge or tax on dividends assuming you need the money for the longer term.

I suspect you are unlikely to get the level of reassurance you are after, so if that is a deal-breaker, it probably isn't for you.

[Olly]

OK...I'm all up for digging deeper. Though the saving is pretty small at around 1.21% (assuming all company profits extracted without tax over and above 21% CT).

For me, the real key thing would be a written letter agreeing to the process by someone who enforces the rules and has the authority to make such a statement.

As I mentioned before, if this is such an ideal solution then why don't we all immediately do it, especially as offset interest rates are pretty darn competitive. I'd imagine it's because such proof from tax authorities doesn't exist and you yourself say HMRC are likely to say it's a no go.

[THEPUMA]

Isn't that what the guys who ran all the off-shore schemes said as well

True you got me there!

[THEPUMA]

So what is the justification for a company doing it?

They are moving from an account paying a low rate of interest to one paying zero rate of interest. I'm not a mathematician by any means, but I think that something is better than nothing.

I just can't see how one can argue that there is a benefit / justification to the company in doing this.

The justification is that the security of your deposit is improved. It is unlikely that your bank/lender will call in your mortgage whilst not repaying your bank deposit. I think in some cases they are obligated to "net off". From memory this depends whether the lender is a bank or building society.

In any event, I don't think a director is obliged to deposit company monies in the highest interest-yielding deposit account. If they were, there would be a lot who had put their money in Icelandic banks who would now be skint.

PUMA

[TheFaQQer]

I am a qualified Chartered Accountant and qualified with the Institute of Tax. I am a principal (the LLP equivalent of a partner) in a large firm of accountants. I have had an opinion on this specific matter from a partner in another firm of accountants who regularly writes technical articles in the tax press. I am also aware of several people operating in this manner who need to be absolutely squeaky clean as any hint of tax evasion would be career-threatening.

Isn't that what the guys who ran all the off-shore schemes said as well