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Directors Loan - When to repay and what is acceptible

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    Directors Loan - When to repay and what is acceptible

    Hi,

    I took out a loan from my company to the sum of £5000.00 back in May 2015. I've been paying it off slowly and my accountant has advised me:

    "If the loan is less than £10,000 at the year-end (30/09/15) there are no consequences if the loan remains unpaid after 9 months of the year-end."

    But I find the HMRC guide lines less definitive:

    https://www.gov.uk/directors-loans/y...-company-money

    If I'm reading it correctly then it doesn't mention anything about this. They simply say that if the loan isn't paid within 9 months of the end of year then there will be consequences (Tax, benefit in kind etc).

    I'm not trying to undermine my accountant but I'd like to see some concrete evidence to consolidate their advice.

    Does anyone have any concrete information that would bring clarity to this?

    #2
    There are two parts to Director's Loans;

    Any loan over £10,000 will be a benefit in kind, and you’ll pay tax on the deemed value of any interest you’ve saved by not going to a bank.

    Keep in mind this is the total value of money you owe the company, so if you take a loan of £10,000 and then overpay your wages by £2 then the loan is £10,002 and becomes taxable. There is no benefit in kind if you pay interest to the company at 3%.

    Any loans outstanding at the balance sheet date (company yearend) have to be disclosed in the accounts and on the company tax return. If they are not repaid within 9 months of the year end then the company will pay extra Corporation Tax (s455 charge) of 25% of the loan value (pre 5 April 2016), increasing to 32.5% for loans on or after 6 April 2016.

    This extra 25%/32.5% is repaid to the company by HMRC when you repay the loan to the company. You should avoid repaying a loan and then taking it out again soon after as it’s an obvious avoidance tactic HMRC call bed & breakfasting. They will see through it and tax it as if it had never been repaid. If loans are outstanding this will also delay us filing the accounts until they are either paid, or you agree the extra tax charge.

    Comment


      #3
      It needs repaying is my understanding. I am not an accountant though.

      Comment


        #4
        Originally posted by Louisa@InTouch View Post
        There are two parts to Director's Loans;

        Any loan over £10,000 will be a benefit in kind, and you’ll pay tax on the deemed value of any interest you’ve saved by not going to a bank.
        Thanks for that.
        If I was to take say £20 000 as loan, how much tax will I pay? On what taxable base?
        Does it mean I can take 20k loan and pay 3% interest to the company and not pay tax?

        Also, if the loan in not paid 9 months after year end, the co will pay 32.5% s455 charge, but when the loan is repaid this charge will be refunded. Is that right? If so, does it mean one can take 20k and only pay 3% interest to co?

        And finally is the loan tax deductible for corp tax?

        Comment


          #5
          Originally posted by garnet View Post
          Thanks for that.
          If I was to take say £20 000 as loan, how much tax will I pay? On what taxable base?
          Does it mean I can take 20k loan and pay 3% interest to the company and not pay tax?

          Also, if the loan in not paid 9 months after year end, the co will pay 32.5% s455 charge, but when the loan is repaid this charge will be refunded. Is that right? If so, does it mean one can take 20k and only pay 3% interest to co?

          And finally is the loan tax deductible for corp tax?
          The benefit in kind will be calculated on the amount of the loan across the tax year and how long it was outstanding for. If you had a loan of £20,000 consistent across the full tax year the cash equivalent (benefit at 3%) would be £600. This would added as additional employment income on your SATR. Whilst your company would pay 13.8% of the £600 = £82.80 due in July following the tax year.

          If you were to charge yourself at least the ORI (3%) you would not have any BIK implications.

          Any loans not repaid within 9 months will have the s455 charge, despite of whether you have paid interest or not. When the loan is repaid in full, you can then reclaim any s455 charge on the next CT600 return.

          Any interest that your company receives on the loan will be income that is subject to CT.

          Comment


            #6
            Originally posted by Louisa@InTouch View Post
            The benefit in kind will be calculated on the amount of the loan across the tax year and how long it was outstanding for. If you had a loan of £20,000 consistent across the full tax year the cash equivalent (benefit at 3%) would be £600. This would added as additional employment income on your SATR. Whilst your company would pay 13.8% of the £600 = £82.80 due in July following the tax year.

            If you were to charge yourself at least the ORI (3%) you would not have any BIK implications.

            Any loans not repaid within 9 months will have the s455 charge, despite of whether you have paid interest or not. When the loan is repaid in full, you can then reclaim any s455 charge on the next CT600 return.

            Any interest that your company receives on the loan will be income that is subject to CT.
            Reason for asking about loans is because it seems to me this might a cheaper way to take money out of the company than dividends with the new divi tax of 7.5%

            Is that so?

            My calculation for 20k
            if divi and 5k divi allowance taken = 20k @7.5% = £1500
            if loan and pay 3% interest, no taxes and NIC, you pay £600 to co, co pays 20% @ £600 = £120 per year. then if not repaid 9 months after year's end 25% of the loan = £5000, but you can reclaim this when you repay.

            However I see this on GOV.UK

            Pay 25% of the outstanding amount as Corporation Tax.

            Interest on this Corporation Tax will be added until the Corporation Tax is paid or the loan is repaid.

            You can reclaim the Corporation Tax - but not interest.
            What is the bold though? What interest there?

            So is this a better way to get money out (granted you have to repay, but at least it is cheaper that a mortgage or bank loan), or am I missing something major?

            Comment


              #7
              But you've got to ultimately put the money back in to the company and get taxed heavily when you take it all out at the end and go over the higher rate threshold?
              'CUK forum personality of 2011 - Winner - Yes really!!!!

              Comment


                #8
                Yes as NLUK states, at some point you will need to repay the money back to the company. At that point, you will have to pay the taxes due on the dividend income - assuming you then take the funds personally again at a later date.

                This is why the s455 charge has increased to 32.5% for loans taken on or after 6 April 2016, as this matches the taxes due on dividends over the higher rate threshold.

                Either way HMRC will get their money - either through s455 charges or through your personal taxes...

                Comment


                  #9
                  Originally posted by northernladuk View Post
                  But you've got to ultimately put the money back in to the company and get taxed heavily when you take it all out at the end and go over the higher rate threshold?
                  Exactly. Directors loans are a tax delaying strategy, not a tax avoidance strategy.

                  Bit worrying that OP's accountant has misunderstood the very clear rules regarding repayment of director loans or confused them with the £10k BIK limit (or OP has misunderstood their accountants advice) though!

                  Comment


                    #10
                    Originally posted by Louisa@InTouch View Post
                    Yes as NLUK states, at some point you will need to repay the money back to the company. At that point, you will have to pay the taxes due on the dividend income - assuming you then take the funds personally again at a later date.

                    This is why the s455 charge has increased to 32.5% for loans taken on or after 6 April 2016, as this matches the taxes due on dividends over the higher rate threshold.

                    Either way HMRC will get their money - either through s455 charges or through your personal taxes...

                    I am talking about tax delaying.
                    For example say I need 20k now. I have taken 5k divi, but need another 20k. This will cost me £1500 if in divi.

                    I have income so this 20k will be repaid in the next 40 months if loan. My co's year end is end of November.

                    So if taken now the loan will cost me:

                    600 for 1st year in interest to my co (120 corp tax)
                    and so forth deceasing interest. Lets say for simplicity 3 years @ £120 corp tax on interest = £360

                    In August 2017 s455 kicks in and I need to pay 32.5% on 12500 (20k - repaid) = £4062. Loan repaid in full 25 month later and the s455 is claimed back.

                    Total cost for 20k is 360.

                    Cheapest bank loan has a cost of £1500.

                    Is my calculation right?

                    Comment

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