Directors loan to pay off mortgage

[Bradley]

Value Shifting?

My concern with this type of thing would be getting into a potential argument with HMRC about lost revenue due to shifting tax charges into different years, which in theory could happen if you're shifting a dividend from higher rate to basic rate via a loan which is then repaid in a new tax year at a lower rate. Whilst every taxpayer is free to arrange his (or her) affairs in the most tax efficient way possible, HMRC obviously don't always see it that way.

HMRC would absolutely not question the timing of a distribution in the way you suggest.

I think that you are probably implying that the transactions in securities legislation could apply here but that is not a proper reading of s684 imho. If you're that worried perhaps you could apply for clearance!

[Clare@InTouch]

So you'll see from what is said that they will question it when a loan is repaid in a way that does not result in a tax charge e.g. by temporarily replacing the loan with another loan. Declaring a dividend does create a tax charge albeit that the charge is probably covered by a tax credit.

My concern with this type of thing would be getting into a potential argument with HMRC about lost revenue due to shifting tax charges into different years, which in theory could happen if you're shifting a dividend from higher rate to basic rate via a loan which is then repaid in a new tax year at a lower rate. Whilst every taxpayer is free to arrange his (or her) affairs in the most tax efficient way possible, HMRC obviously don't always see it that way. As you say it could likely be refuted, but it doesn't do any harm to mention the possibility as we know so little about the OP's personal tax situation.

Anyway, my original point was that it could be questioned, so it was something the OP might want to raise in passing with his accountant.

[Bradley]

Read it more carefully ...

They can question it, it depends on the circumstances surrounding the repayment:

EM8565 - Close Companies: ICTA88/Section 419 Claim: Loans to Participators: Bed and Breakfasting

Section 419 is essentially an anti-avoidance provision creating a temporary tax charge designed to dissuade participators and their associates from extracting funds from the company in the guise of loans rather than as remuneration or dividends. If our action results in repayment of the loans to extinguish the charge the section has achieved its purpose.

So you'll see from what is said that they will question it when a loan is repaid in a way that does not result in a tax charge e.g. by temporarily replacing the loan with another loan. Declaring a dividend does create a tax charge albeit that the charge is probably covered by a tax credit.

[Clare@InTouch]

HMRC would not question the repayment of a loan by dividend shortly followed by a new loan.

The HMRC manuals talk about loans as being a method of avoiding income tax on dividends so it would be easy to refute an HMRC attack on the basis that a loan had been repaid with a dividend!

They can question it, it depends on the circumstances surrounding the repayment:

EM8565 - Close Companies: ICTA88/Section 419 Claim: Loans to Participators: Bed and Breakfasting

Section 419 is essentially an anti-avoidance provision creating a temporary tax charge designed to dissuade participators and their associates from extracting funds from the company in the guise of loans rather than as remuneration or dividends. If our action results in repayment of the loans to extinguish the charge the section has achieved its purpose.

Some participators may arrange a temporary repayment of the loan to try to circumvent section 419 liability: the extracted funds are repaid and withdrawn the following day or shortly thereafter. Often these “bed and breakfast” transactions are carried out around the end of the accounting period to prevent the loans appearing on the company’s Balance Sheet but it may also be done around the date which is 9 months after the end of the accounting period as that is the trigger date for liability to the charge.

Where you suspect bed and breakfasting of loans you need to establish the facts. You should seek evidence that repayment took place and that any book entries reflect genuine underlying transactions. CT&VAT (Technical) can advise on the information to be obtained. If there is no such evidence you should contend there is section 419 liability, or challenge a claim for section 419(4), on the grounds that viewed realistically no repayment of the loan was made.

Where you have cause to doubt that the repayment arrangements were intended to achieve genuine repayment of the loan you should submit cases at an early stage to CT&VAT (Technical) where bed and breakfasting is disputed and a contentious appeal may result. They will consult the Anti Avoidance Group (AAG) and advice will be given on the various arguments to run in appropriate cases.

You should consider penalties for inaccuracies when a temporary repayment arrangement is successfully challenged. This could be because of the incorrect accounts where the bed and breakfasting occurred around the accounting date, on the grounds that the Balance Sheet was carelessly or deliberately misleading. Where the loan was on the Balance Sheet but was claimed to have been repaid within 9 months of the end of the accounting period there could be a carelessly or deliberately incorrect claim for section 419(4) relief.


EM8565 - Close Companies: ICTA88/Section 419 Claim: Loans to Participators: Bed and Breakfasting

[Bradley]

Thats Not Correct

Totally agree with this.

Also be careful about 'bed & breakfasting' loans. If you take out a loan and repay it via a dividend just before the 9 month limit, then take another just after, HMRC could look through to the reality of the transaction and just charge the extra 25% CT anyway (known as section 455 tax).

HMRC would not question the repayment of a loan by dividend shortly followed by a new loan.

The HMRC manuals talk about loans as being a method of avoiding income tax on dividends so it would be easy to refute an HMRC attack on the basis that a loan had been repaid with a dividend!

[Clare@InTouch]

Welcome

It has been discussed here a bit,have a read of my post on the subject a little while ago. Generally the initial advice is NOT to take directors loans because people are tempted to do it, spend all the money and get themselves into a load of grief. The problem is that you can take the loan but it must NOT be outstanding 9 months after the end of the company tax year or you get hit by a tax charge of 25% on the loan amount and while you can get this back, it won't be for another year or so.

If you are sure you know what you are doing (and it sounds like your accountant is on the ball) then you can take a directors loan but you have to pay interest to the company on the loan, (currently 4% which then becomes company profit that you get back minus tax) so your net interest rate is probably going to be about 1%. Alternatively you can take the loan interest free and pay tax on the benefit in kind of the loan.

It sounds like your accountant is confident about what they are doing but for your peace of mind, ask them "what about this 25% tax charge on the loan amount 9 months after the company year end", see here for a reference from HMRC. Make them explain to you why and how you are avoiding this 25% charge and how you will be able to pay back the loan (probably by declaring a dividend by the sounds of it) before that drop dead date. I'm sure they are on the ball, you just want them to explain it all to you...

Totally agree with this.

Also be careful about 'bed & breakfasting' loans. If you take out a loan and repay it via a dividend just before the 9 month limit, then take another just after, HMRC could look through to the reality of the transaction and just charge the extra 25% CT anyway (known as section 455 tax).

[Waldorf]

I agree with Wanderer, taking a directors loan is questionable, my accountants advise against it and paying it back over two years is strange advice.

I would go back to your accountant and question it.

[Wanderer]

It sounds a clever way of doing things but wanted to check this is all above board. The accountants have a very good reputation, but I always like to get a second opinion on things.

Welcome

It has been discussed here a bit,have a read of my post on the subject a little while ago. Generally the initial advice is NOT to take directors loans because people are tempted to do it, spend all the money and get themselves into a load of grief. The problem is that you can take the loan but it must NOT be outstanding 9 months after the end of the company tax year or you get hit by a tax charge of 25% on the loan amount and while you can get this back, it won't be for another year or so.

If you are sure you know what you are doing (and it sounds like your accountant is on the ball) then you can take a directors loan but you have to pay interest to the company on the loan, (currently 4% which then becomes company profit that you get back minus tax) so your net interest rate is probably going to be about 1%. Alternatively you can take the loan interest free and pay tax on the benefit in kind of the loan.

It sounds like your accountant is confident about what they are doing but for your peace of mind, ask them "what about this 25% tax charge on the loan amount 9 months after the company year end", see here for a reference from HMRC. Make them explain to you why and how you are avoiding this 25% charge and how you will be able to pay back the loan (probably by declaring a dividend by the sounds of it) before that drop dead date. I'm sure they are on the ball, you just want them to explain it all to you...

[Digitalfm]

Hi,

I have about £70k profit in my business account after all taxes calculated. At the end of the year I'm looking to pay off my mortgage.

I have most the money already but will be looking to withdraw about £30k by the end of the year to make up the rest of what I need.

Given i normally draw a salary and divi's totalling about the £40k mark per year, my accountant advised that it would be better to take the additional 30k as a directors loan and pay it back over the next 2 years from the 40k I normally draw. This works as if I don't have a mortgage I can use the extra money to pay off the loan and still stay in or around the 40k threshold for lower rate tax.

This means I save paying the higher rate tax on the 30k.

It sounds a clever way of doing things but wanted to check this is all above board. The accountants have a very good reputation, but I always like to get a second opinion on things.

All help appreciated

Thank you