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Retained profit in Ltd: can this be lent out at commercial interest rate?

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    Retained profit in Ltd: can this be lent out at commercial interest rate?

    I'm running this by my accountant but he's not available jusqu'a tomorrow.

    Maybe some of you have an idea on this proposal.

    I have some retained profits in my Ltd, which of course are earning a tremendous rate of interest at 0.05%. I see an opportunity to earn say 4.5% by lending it to my wife, who wants to buy an investment property.

    So, rather than her go out to market and get a rip-off BTL mortgage from the banking system, she can take the loan from my Ltd and pay back installments at 4.5% interest every month.

    The interest will of course be subject to corporation tax, but the idea means extra profit for the Ltd so appears to be good business sense.

    Is this a viable plan?

    #2
    Originally posted by ChimpMaster View Post
    I'm running this by my accountant but he's not available jusqu'a tomorrow.

    Maybe some of you have an idea on this proposal.

    I have some retained profits in my Ltd, which of course are earning a tremendous rate of interest at 0.05%. I see an opportunity to earn say 4.5% by lending it to my wife, who wants to buy an investment property.

    So, rather than her go out to market and get a rip-off BTL mortgage from the banking system, she can take the loan from my Ltd and pay back installments at 4.5% interest every month.

    The interest will of course be subject to corporation tax, but the idea means extra profit for the Ltd so appears to be good business sense.

    Is this a viable plan?
    Is your wife a director or shareholder (material interest) in the company? It's likely that the loan to your wife (as an associate) will be treated as a director's loan in the accounts and therefore subject to Section 419.

    Section 419 tax is basically 25% of the remainder of the director's loan balance at the financial year end, 9 months later e.g. if the director's loan balance at the year end is £10k and you repaid £4k within 9 months, the balance is £6k and so s419 tax of £1,500 is due to HMRC (which the company get back once the remaining £6k has been fully repaid.

    Paying back 4.5% into the company will remove any BIK issues, but you need to think about the s419 implications.

    Comment


      #3
      Hi Craig and thanks for the reply. My wife is a 50% shareholder but not a director. I can't actually remember if she's a secretary (documents are at the home office).

      Would s419 still apply?

      I was thinking of a much bigger loan than £10k, and over a long period, so the 25% tax would kill this proposal.

      I didn't quite understand what you meant by "which the company get back once the remaining £6k has been fully repaid". Can you please elaborate?

      Comment


        #4
        Unfortuantely, like every other idea about re-investing company cash this probably won't fly due to the amount of tax due on it while the money is out else the scheme would be well known to us all and we would all be doing it. There are enough clever people out there that could devise some simple scheme for us to extract our money and put it to use but the reality is that so far we don't have a single worthwhile option so they must have this one bolted down pretty tightly.
        'CUK forum personality of 2011 - Winner - Yes really!!!!

        Comment


          #5
          Originally posted by ChimpMaster View Post
          Would s419 still apply?
          As your wife is associated s419 tax will apply.

          Originally posted by ChimpMaster View Post
          I didn't quite understand what you meant by "which the company get back once the remaining £6k has been fully repaid". Can you please elaborate?
          Say you had a director's loan account balance at 31 January 2010 of £10K. You repaid £4k back to the company by end of October 2010. The original £10k loan balance at 31 January 2010 now stands at £6k, so the company would have paid £1,500 in s419 tax. Say you repaid the £6k back to the company today. You can reclaim the £1,500 in s419 that was paid to HMRC back after October 2011. 2011 is not a typo. Its the earliest you can reclaim the s419 tax back. The s419 tax will be repaid back to your limited company.

          Comment


            #6
            Get an offset BTL mortgage and then place a deed of trust to put your business money against that loan.

            The issue you will then have is deducting the loan interest from the rent you receive (so you would probably be taxed on the entire rent). However as you should be able to rapidly repay the entire loan off I can't see that being a serious worry.
            merely at clientco for the entertainment

            Comment


              #7
              Thanks again Craig. I did some reading up on s419 and it's clear now. Shame though, it is too convoluted to be worthwhile.

              I wonder if the Ltd could lend the cash to a 3rd party (say, my mother, who has no association with the Ltd) and then she could just give it to my wife to buy the property. My mother would be making the loan repayments at 4.5% interest and the wife would give her the rent to do this.

              Why can't life be simple (rhetorical question, no need to answer!)

              Comment


                #8
                HMRC would see through this created structure as your wife will ultimately end up with the cash which means (putting it softly) your company would "not pay tax on" which is not allowed. Even if it was legal, you would need to consider IHT on the loan from mother to wife. Simply put, you would be better off taking it as a dividend and paying the 25% HR tax in that case.

                Other options to think about is having the BTL in the company or perhaps setting up a separate company to invest in BTL.

                Comment


                  #9
                  Originally posted by Craig@InTouch View Post
                  <snip>Other options to think about is having the BTL in the company or perhaps setting up a separate company to invest in BTL.
                  I was thinking about this as another option. My wife already has her own Ltd used for processing rental payments (the Ltd doesn't actually own the houses). Eventually we'll probably transfer all BTLs into her Ltd Co, so as to pass it on to the kids without incurring IHT.

                  So I was thinking of my Ltd loaning her Ltd the money to purchase the BTL. Her Ltd would pay my Ltd the loan + interest each month.

                  Pushing the boat out on free advice here.... could I bother you yet again for your opinion on this?

                  Comment


                    #10
                    Originally posted by ChimpMaster View Post
                    I was thinking about this as another option. My wife already has her own Ltd used for processing rental payments (the Ltd doesn't actually own the houses). Eventually we'll probably transfer all BTLs into her Ltd Co, so as to pass it on to the kids without incurring IHT.
                    You need to plan this one as IHT can still apply as the value of the shares in the company. Would they be shareholder? Presumably the company is not worth much at the moment which may be a good time for them to become shareholders. I would suggest speaking to a solicitor and IFA on IHT planning.

                    Originally posted by ChimpMaster View Post
                    So I was thinking of my Ltd loaning her Ltd the money to purchase the BTL. Her Ltd would pay my Ltd the loan + interest each month.
                    This can be done. Your accountant (if you have one) will just need to account for the loan interest correctly in both companies.

                    Comment

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