Borrowing Money From Your Company
It may not be as interest-free as you think ...
POSTED BY HELEN BEAUMONT ON 22/12/2017 @ 8:00AM
When we run a successful business, it's tempting to get a loan from our company. Where an interest-free loan is made to a director of a family company, an income tax charge may arise on the beneficial loan ...
Thinking of borrowing money from your company? It may not be as interest-free as you think!
copyright: ljupco / 123rf stock photo (licensee)
Given that most directors are also shareholders, when a loan is made to a shareholder (participator) or an associate of the shareholder, a liability to corporation tax will arise in the company if the loan is outstanding for more than 9 months after the year-end.
For loans made after 5 April 2016 the tax payable is 32.5% of the loan, prior to that date it was 25%. This is often referred to as the Section 455 Tax. Certain loans are excluded, where the amount borrowed does not exceed £15,000, the borrower works full time for the company and does not own more than 5% of the shares.
When the loan is repaid to the company, HMRC will refund the tax paid, but where you have paid tax at both 25% and 32.5% what rate will the refund be at?
An 1816 case known as Clayton's Case established the principle that where a loan is repaid, it is assumed to go against the loan made first, unless there is documentary evidence to show otherwise. This evidence could be a board minute stating which loan the repayment is to be set against.
If the loan is written off, the company is able to recover the Section 455 Tax, but the individual will be subject to income tax at dividend rates, based on the amount written off.
HMRC would also expect that if the individual is also a director, the write off of the loan represents employment income for national insurance purposes and is also subject to NIC.
An obvious tax planning step used to be to repay the loan just before the end of the 9 month period and then draw it down again within a very short space of time.
"But HMRC introduced legislation in 2013 to prevent this bed and breakfasting!"
If you're thinking of borrowing money from your company, then do call me on 01908 774323 or click here to ping me an email and let's see how I can help you.
Until next time ...
If you're looking to work with an expert tax advisor with a wide range of tax experience, do visit www.essendontax.co.uk to find out more about me and discover how I can help!
More about Helen Beaumont ...
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen’s specialist knowledge in tax planning and experience ensures every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
More blog posts for you to enjoy ...