Director's loans - for a house deposit?

[Tricky75]

Hi All

I am a relative newcomer to the world of contracting, having set up my limited company in April last year, so I am 3 months away from my first year end.

I have a question regarding the use of a directors loan account. Could I use this to help towards a house deposit?

Originally I was looking at house hunting in August/September this year, by which time I would have the necessary funds to put towards the deposit. However an ideal property has come onto the market and it is one I would dearly love to try and go for - the stumbling block is not having the funds in place to cover the deposit at this moment in time.

I was hoping to use the directors loan account to help with the deposit. I got in touch with the accountant who advised me that I can do this, but mentioned that an overdrawn directors loan account could spark a HMRC enquiry. What are other people's views on this?

If this is not a recommended route to go follow, does anyone else have any suggestions as to obtaining finance?
One option I thought of was to get a loan through my bank account, but a) what should my employment status be on the loan application and b) would this have a negative impact on my credit score ?

Any suggestions would be most welcome

Rick

[Clare@InTouch]

I'm not sure how an overdrawn loan would spark an inquiry, but there are tax implications:

Any loan over £5,000 is a benefit in kind, unless you pay the company interest at 4%.

Any loan outstanding 9 months after your company year end will give rise to an extra CT charge equal to 25% of the balance, known as Section 455 tax. This makes a longer term loan no better than a higher rate dividend. The slight benefit is that the S455 tax is repaid to the company when you repay the loan to the company.

[northernladuk]

Getting a loan gives you a better credit situation, having one refused will not help it.

Remember getting a loan also reduces the amount of the mortgage you can have as you have to declare the repayments to the loan.

How much are you looking at? Can't be that much as you won't have massive amounts in the LTD bank in less than a year. You could check Moneysupermarket or similar to find credit cards with long balance tranfer times at 3%. I think standard credit limit if about 5K. If you are a good canditate you may get more?

[Tricky75]

Thankyou both for your replies. I would be looking at £10,000, there is enough money in the company bank account for this amount and I am confident that I would be able to repay it within 9 months of the company year end, I've been crunching the numbers.

Alternative is to get personal bank loan, but I've no idea what I should put down as my employment status on any loan application. Any ideas?

[Clare@InTouch]

Thankyou both for your replies. I would be looking at £10,000, there is enough money in the company bank account for this amount and I am confident that I would be able to repay it within 9 months of the company year end, I've been crunching the numbers.

Alternative is to get personal bank loan, but I've no idea what I should put down as my employment status on any loan application. Any ideas?

You'd be an employee of your limited company.

[northernladuk]

Thankyou both for your replies. I would be looking at £10,000, there is enough money in the company bank account for this amount and I am confident that I would be able to repay it within 9 months of the company year end, I've been crunching the numbers.

Alternative is to get personal bank loan, but I've no idea what I should put down as my employment status on any loan application. Any ideas?

I assume this 10k is money that is owed as VAT and Corp tax. You are taking one hell of a risk loaning yourself this money with a view ot pay it back before year end and pay what you owe. One slip up and you are in some serious doo doo, particularly with the VAT man.

I would suggest that this isn't the way to start running a business as it isn't teaching you the difference between company money that is owed to the powers that be and your money.

Sounds a bit sanctimonious I know but hang around here long enough and you will see the nightmares that keep popping up with tricks like this.

Remember not only is this money that possibly isn't yours it is also the warchest you NEED in the current climate to keep you afloat between gigs, particularly when you new.

[MarillionFan]

Thankyou both for your replies. I would be looking at £10,000, there is enough money in the company bank account for this amount and I am confident that I would be able to repay it within 9 months of the company year end, I've been crunching the numbers.

Alternative is to get personal bank loan, but I've no idea what I should put down as my employment status on any loan application. Any ideas?

NL is just painting the worse picture for you.

By all means take the first £5000 as a loan, and then draw the other £5000. As long as you can pay back and your accountant is OK with the process(ie. declaring it) then I don't see an issue.

[northernladuk]

NL is just painting the worse picture for you.

By all means take the first £5000 as a loan, and then draw the other £5000. As long as you can pay back and your accountant is OK with the process(ie. declaring it) then I don't see an issue.

To be fair MF is quite correct. What he says is possible and I am painting a bad picture... one that we have seen a few times on here so happens. You can do as he says IF you don't get benched and IF you can pay it back. GL to you.

[Spacecadet]

The other aspect to this is that most mortgage applications ask how the applicant is getting the deposit. Reason being is that if it is money that has to be paid back then it makes for a potentially risky lend.
Not telling the bank that the deposit is a loan from your company could be seen as a fraudulant application.

As has been stated; if you were to be benched then you would struggle to pay the mortgage AND the directors loan which is going to see you in double trouble, losing both your home and the right to run a company.

Better to hold off on the house purchase until such a time as you have the cleared cash ready for a deposit

[MarillionFan]

The other aspect to this is that most mortgage applications ask how the applicant is getting the deposit. Reason being is that if it is money that has to be paid back then it makes for a potentially risky lend.
Not telling the bank that the deposit is a loan from your company could be seen as a fraudulant application.

As has been stated; if you were to be benched then you would struggle to pay the mortgage AND the directors loan which is going to see you in double trouble, losing both your home and the right to run a company.

Better to hold off on the house purchase until such a time as you have the cleared cash ready for a deposit

Answer : Money in my current account.