Using Director Loan for Offset Mortgage

[minstrel]

We've all had it drummed into us that director loans over £5,000 are a bad idea and there's no way you can just transfer money from your company account to your offset mortgage and save on interest payments.

A couple of things have happened in recent months which I think may have changed the situation:

1. The HMRC official rates of interest dropped from 6.25% to 4.75% on 01/03/09
2. The rate of interest that most banks are giving for deposit accounts is dropping close to zero

If you are stuck on a fixed rate offset mortgage, you are probably getting tired of all your friends on trackers telling you how much money they are saving each month. I think there is a way to save a bit on interest payments.

Here's my logic, see what you think. I'm assuming a fixed rate offset mortgage of 4.99% and 0% interest on company funds.

So, if my company gave me a loan of £10,000 as long as I paid 4.75% interest then no BIK would arise.

I loan £10,000 and pay £499 less on my mortgage. I have to pay company £475 to avoid BIK which I do. I'm personally £24 (0.24%) better off, plus my company has £475 which after CT becomes £375 which could be distributed as dividends.

I'm up £24 + £375 = £399 i.e. 3.99%.

In other words I'm getting an effective rate of interest of 3.99% after tax by investing company funds in offset mortgage.

Can someone now please point out to me what I've missed? I'm sure there must be a catch as this sounds too good to be true.

[moorfield]

I thought about this kind of caper but couldn't be bothered - I think the gains to be had are too marginal to make it worthwhile, and you'd have to keep it going for the duration of the mortgage.

I find the directors loan is quite a handy facility to have when I need lumps of cash at short notice eg. tax bills, big purchases etc. etc. that I know I can pay back from the next invoice.

[Danbro]

Directors Loan

We've all had it drummed into us that director loans over £5,000 are a bad idea and there's no way you can just transfer money from your company account to your offset mortgage and save on interest payments.

A couple of things have happened in recent months which I think may have changed the situation:

1. The HMRC official rates of interest dropped from 6.25% to 4.75% on 01/03/09
2. The rate of interest that most banks are giving for deposit accounts is dropping close to zero

If you are stuck on a fixed rate offset mortgage, you are probably getting tired of all your friends on trackers telling you how much money they are saving each month. I think there is a way to save a bit on interest payments.

Here's my logic, see what you think. I'm assuming a fixed rate offset mortgage of 4.99% and 0% interest on company funds.

So, if my company gave me a loan of £10,000 as long as I paid 4.75% interest then no BIK would arise.

I loan £10,000 and pay £499 less on my mortgage. I have to pay company £475 to avoid BIK which I do. I'm personally £24 (0.24%) better off, plus my company has £475 which after CT becomes £375 which could be distributed as dividends.

I'm up £24 + £375 = £399 i.e. 3.99%.

In other words I'm getting an effective rate of interest of 3.99% after tax by investing company funds in offset mortgage.

Can someone now please point out to me what I've missed? I'm sure there must be a catch as this sounds too good to be true.

Hi,

You just need to remember the S419 charge of 25% of any directors loans still outstanding in 9months 1 day after your year end.

You will get this refunded 9 months after the accounting period in which the loan is repaid, so really if you incur this and repay the loan just after the 9 months then you will have to wait another year to get the money back

Thanks
Neil
Danbro

[minstrel]

I thought about this kind of caper but couldn't be bothered - I think the gains to be had are too marginal to make it worthwhile, and you'd have to keep it going for the duration of the mortgage.

I find the directors loan is quite a handy facility to have when I need lumps of cash at short notice eg. tax bills, big purchases etc. etc. that I know I can pay back from the next invoice.

I looked at it last year and the numbers didn't stack up. I worked out that when the effective rate was 6.25% and business savings rates were 5% there was no gain.

With all the changes in interest rates I think it does stack up now. At close to 4% it's hardly marginal. If you've got £50k in business account that's £2k per year for doing a few transfers to offset mortgage.

[minstrel]

Hi,

You just need to remember the S419 charge of 25% of any directors loans still outstanding in 9months 1 day after your year end.

You will get this refunded 9 months after the accounting period in which the loan is repaid, so really if you incur this and repay the loan just after the 9 months then you will have to wait another year to get the money back

Thanks
Neil
Danbro

Good point Neil. I did think about that. I heard that as long as you paid off the loan before the end of the company financial year it wouldn't be liable to the S419 charge.

Next financial year you could take out another one.

Or does it not work like that?

[minstrel]

This is the bit I saw on the HMRC website which suggested the 25% charge doesn't apply if it is paid off before period end.

Your director’s loan account is paid off by the end of your company’s accounting period
If you pay off your director’s loan in full by the last day of your company’s Corporation Tax accounting period:

your company does not pay Corporation Tax on the loan
you don’t need to tell HMRC about the loan on your Company Tax Return
For example, your company’s accounting period runs from 1 April 2008 to 31 March 2009, and you pay off your director’s loan account on 30 March 2009. You do not need to include any information about this loan on your Company Tax Return.