Reply to: Offset Mortgages

[DigitalUser]

A whole host of reasons surely.....

Such as? I don't see why the bank does need to know. I also don't see where the HMRC challenge to this offset arrangment (through a deed of trust) could come from, given the implicated BIK is against a private financial institution, and not HMRC themselves.

[northernladuk]

(c) ...er....what would you tell the bank? why would the lender need to know about where the money in the offset account came from?

A whole host of reasons surely.....

[Olly]

(b) keep the money in a separate account from your personal funds at all times, and (c) tell the bank what you're doing - then you will be on strong footing.

(b) From looking into offset mortgages recently it seems that many lenders expect you to use your the offset account as your personal current account but it looks like there's nothing to stop you not doing that meaning the only debits and credits would be to and from your Ltd. Obviously though the Ltd would not receive interest and the account would be in your own name.

(c) ...er....what would you tell the bank? why would the lender need to know about where the money in the offset account came from?

HMRC have set a 4% rate for loans but how is that fair when about the best I can get for my Ltd is 1.75% (Investec are closing their Hi5 account and I can't be doing with chasing introductory rates on long notice accounts for an extra 0.25%)

Even if you do pay the full 4% to your Ltd you still get it back minus 20% Corp Tax + any personal tax which for me is none.

Are bank statements the first thing HMRC look for when investigating? Investigating what? My Ltd already has a number of bank accounts and money flips between them fairly often including between currencies. I account for it all accurately and pay corp tax on any interest but still it's not that simple to see what's going where and why. I know why, but you can't see that from the statements.

[Greg@CapitalCity]

Hmm, reading about the case it sounds like the director was playing a bit fast and loose with the company's money to be honest. In particular the bit where he wrote-off part of the loan as a bad debt and sought a deduction as a trading expense wasn't ever going to wash with HMRC. Then he sold his company van and used the money to buy a car for his own personal use...

I don't know if we are really any the wiser if the trust system (done properly) would work for us until someone tries it and gets investigated.

Yep, he certainly was playing fast and loose with company money. I think the issue of whether a trust system works is clear - what is less clear is what to do to ensure you are actually holding company funds 'on trust'. The guy in this case was nowhere near meeting the requirements. I think so long as you (a) ask the shareholders to pass a resolution approving the arrangement; (b) keep the money in a separate account from your personal funds at all times, and (c) tell the bank what you're doing - then you will be on strong footing.

@Wanderer - The theoretical situation where business assets (like cash in the bank) were used to guarantee, underwrite or offset the interest payable a director's personal debt......off hand i can't think of how a BIK charge (or any other tax effect) would apply until the funds are actually put to use somewhere other than in the business bank account. I suspect though your first hurdle will be finding an institution that offers such a product. Let me know if you do, and I will take a closer look at this.

[northernladuk]

Hmm, reading about the case it sounds like the director was playing a bit fast and loose with the company's money to be honest. In particular the bit where he wrote-off part of the loan as a bad debt and sought a deduction as a trading expense wasn't ever going to wash with HMRC. Then he sold his company van and used the money to buy a car for his own personal use...

I don't know if we are really any the wiser if the trust system (done properly) would work for us until someone tries it and gets investigated.

You first

[Wanderer]

Interestingly, it seems if he had the right paperwork in place, and put his company funds into a 'high interest' personal savings account (that did nothing other than hold his company money), he would have been OK.

There's a bit more on it here;
Gabelle Tax Analysis: The dangers of mixing corporate and personal funds | AccountingWEB

Hmm, reading about the case it sounds like the director was playing a bit fast and loose with the company's money to be honest. In particular the bit where he wrote-off part of the loan as a bad debt and sought a deduction as a trading expense wasn't ever going to wash with HMRC. Then he sold his company van and used the money to buy a car for his own personal use...

I don't know if we are really any the wiser if the trust system (done properly) would work for us until someone tries it and gets investigated.

[eek]

The time limit is the way HMRC deter directors loans actually. May I refer the honourable gentleman to the discussion about Directors loans a while back and specifically S455 charge due at 9 months after the company year end.

Greg@CapitalCity - thanks for the link about holding money in trust, it's been discussed here but no one was quite sure if it had been tried and tested.

Greg, what do you think about the theoretical situation where business assets (like cash in the bank) were used to guarantee, underwrite or offset the interest payable a director's personal debt (eg, a mortgage on a privately owned residence) but without the cash ever leaving the business account. Is there some rule to prevent that? Would it be a BIK? Are banks just not willing to offer such a product?

That is what the example above is about. I don't think its the best example as the issue seems to be about putting the company money in the same account as non company money rather than in a single self contained account under your name.

[northernladuk]

The time limit is the way HMRC deter directors loans actually. May I refer the honourable gentleman to the discussion about Directors loans a while back and specifically S455 charge due at 9 months after the company year end.

Indeed but that is refundable (eventually) so should I would assume this would be factored if you were going to do the loan properly. I assumed time would be a factor when planning this type of loan but not an issue... if that makes sense.

[Wanderer]

A full loan has a whole different set of complications but a time limit isn't one of them I don't believe.

The time limit is the way HMRC deter directors loans actually. May I refer the honourable gentleman to the discussion about Directors loans a while back and specifically S455 charge due at 9 months after the company year end.

Greg@CapitalCity - thanks for the link about holding money in trust, it's been discussed here but no one was quite sure if it had been tried and tested.

Greg, what do you think about the theoretical situation where business assets (like cash in the bank) were used to guarantee, underwrite or offset the interest payable a director's personal debt (eg, a mortgage on a privately owned residence) but without the cash ever leaving the business account. Is there some rule to prevent that? Would it be a BIK? Are banks just not willing to offer such a product?

[northernladuk]

You can just take all of you cash and stick it into a savings account and do this, as long as you pay it back within the given time period.

Are you sure you are not mixing two issues here. A directors loan of up to £5k has to be paid back within 18 months of year end. A full loan has a whole different set of complications but a time limit isn't one of them I don't believe.

[eek]

You can just take all of you cash and stick it into a savings account and do this, as long as you pay it back within the given time period.

That's a directors loan. This is a different method.

[LatteLiberal]

You can just take all of you cash and stick it into a savings account and do this, as long as you pay it back within the given time period.

[northernladuk]

You know, there was a recent case on this. It centered around the Director holding his company funds in his personal account 'on trust' - that is, the money was NOT loaned to him, but rather he just happened to be holding onto it. Turned out that he used the funds for personal purposes, including putting a chunk into his personal offset mortgage account - the HMRC didn't like it, and he got clobbered.

Interestingly, it seems if he had the right paperwork in place, and put his company funds into a 'high interest' personal savings account (that did nothing other than hold his company money), he would have been OK.

There's a bit more on it here;
Gabelle Tax Analysis: The dangers of mixing corporate and personal funds | AccountingWEB

Great find. ThePuma mentioned the option of putting money in trust to use against mortgages but didn't have an history to say whether this would work or not and it looks like that option is out now. The option to put it in a high interest account is still there but obviously seems to be pushing the boundries to far (for the actual gains with interest at the level it is).

[Greg@CapitalCity]

You know, there was a recent case on this. It centered around the Director holding his company funds in his personal account 'on trust' - that is, the money was NOT loaned to him, but rather he just happened to be holding onto it. Turned out that he used the funds for personal purposes, including putting a chunk into his personal offset mortgage account - the HMRC didn't like it, and he got clobbered.

Interestingly, it seems if he had the right paperwork in place, and put his company funds into a 'high interest' personal savings account (that did nothing other than hold his company money), he would have been OK.

There's a bit more on it here;
Gabelle Tax Analysis: The dangers of mixing corporate and personal funds | AccountingWEB

[Wanderer]

That is a commercial mortgage, and it is right for a business to be able to offset its assets against its liabilities, as can be done in personal offset mortgages.

Hmm, not quite the holy grail we seek then.

If some lender did offer a product like this then it would be very popular. Aside from the usual VAT and CT cash at hand, a wealthy business person could retain substantial cash reserves in their LTD company to avoid higher rate tax liabilities but still use the money to offset their mortgage debt, perhaps indefinitely.

I wouldn't be surprised if there is a HMRC rule regarding the company acting as a guarantor or underwriting loans taken out by the director which catch this case and make it unattractive, otherwise every bank on the high street would be offering a product like this...