Reply to: Does the company have to have retained profits to loan money?

[TheCyclingProgrammer]

That's what I thought. The fact that it seems "too good to be true" being a key indicator.

Just too easy to take the money out in one go, pay off the interest only at commercial rates (that prevents compounding) and use future 'paper only' dividends to pay off the capital. It's why director loans are treated differently as preferential loans.

IANAL IANAA

Don't get me wrong - if you have the reserves/cashflow to accommodate an s455 payment for however many years you agree to provide a loan, then you can absolutely do that.

Its not uncommon for close companies to provide longer term loans to their directors in this way - the fact that s455 charges get repaid when the loan is repaid is an acknowledgment of the fact that not everyone who takes directors loans is trying to avoid paying tax. Whether or not its sensible really depends on the circumstances.

AFAIK the only time an s455 charge could be avoided is if the company was in the business of providing commercial loans, was regulated as such and was not a close company - in this case it could of course provide a commercial loan to its director, but that wouldn't apply to anyone here.

[jamesbrown]

Indeed, the s455 tax (or charge) is a tax on loans to participators in close companies and the story pretty much ends there. There are very limited exclusions, but commercial terms are completely orthogonal to the question of the s455 tax. Commercial terms may avoid the individual paying additional tax, but they will not avoid the s455 tax on the company.

[Lance]

I’m pretty certain this would not magically make it a “commercial loan”, certainly not one that would avoid a s455 charge. It’s still a directors loan.

That's what I thought. The fact that it seems "too good to be true" being a key indicator.

Just too easy to take the money out in one go, pay off the interest only at commercial rates (that prevents compounding) and use future 'paper only' dividends to pay off the capital. It's why director loans are treated differently as preferential loans.

IANAL IANAA

[TheCyclingProgrammer]

Correct but it's creating a commercial loan rather than a directors loan in which case it can go on for as long as he wants. A directors loan has to be paid 9 months after the current tax year he's in.

I’m pretty certain this would not magically make it a “commercial loan”, certainly not one that would avoid a s455 charge. It’s still a directors loan.

[ladymuck]

Yes that is a lot of reading.

2.5% isn’t that bad though when it’s going to a company I own.

Simple or compound interest? The former is very cheap indeed.

[Craig@Clarity]

I know that it is not legal to issue dividends unless you do so from retained profits.

However I am in a situation currently where I am a little short (~9k or so) from the house deposit and I would rather not sell any shares to get there (as they were bought at attractive prices during the dips).

I am planning to issue dividends this month after which there will be cash left in the company account (which is last years corp tax + VAT). Can I loan myself the 9k? I am still in contract so the shortfall would be accummulated back within a month or so. There would be no issue with paying VAT or corp tax later down the line.

Yes you can. If the loan amount is outstanding when the year end passes, you have 9 months to repay it back to the company. Any loan balance outstanding after 9 months after the company year end will attract s455 tax e.g. if after 9 months after the year end the loan balance owed to the company is £5k, the company will have to pay s455 tax (25% of £5k balance) to HMRC. The s455 tax is then reclaimed back from HMRC 9 months after the financial year in which the loan had been repaid.

[Lance]

If I had that much cash in the company, I would definitely do that.. unfortunately I have already spent it all on hookers and blow

2020 has been a bad year for that sort of thing.

[cannon999]

Is there such a thing?

Maybe it’s me being cynical but I would have thought any company loan to a controlling individual would be classed as a director loan regardless of the terms.
It’s credit without a credit check therefore preferential by its very nature.


Edit: got me thinking now. If I can have a commercial loan like this, I could lend myself £200k of company money, at 1% over a 15 year period instead of bothering with a mortgage. Sounds too good to be true. Is it?

If I had that much cash in the company, I would definitely do that.. unfortunately I have already spent it all on hookers and blow

[Lance]

There is a whole thing about beneficial loans:

Beneficial loan arrangements (480: Chapter 17) - GOV.UK

Lots to read

You'd probably have to lend at the offiical rate (currently 2.5%) rather than 1%
Rates and allowances: beneficial loan arrangements - GOV.UK

Yes that is a lot of reading.

2.5% isn’t that bad though when it’s going to a company I own.

[ladymuck]

Is there such a thing?

Maybe it’s me being cynical but I would have thought any company loan to a controlling individual would be classed as a director loan regardless of the terms.
It’s credit without a credit check therefore preferential by its very nature.


Edit: got me thinking now. If I can have a commercial loan like this, I could lend myself £200k of company money, at 1% over a 15 year period instead of bothering with a mortgage. Sounds too good to be true. Is it?

There is a whole thing about beneficial loans:

Beneficial loan arrangements (480: Chapter 17) - GOV.UK

Lots to read

You'd probably have to lend at the offiical rate (currently 2.5%) rather than 1%
Rates and allowances: beneficial loan arrangements - GOV.UK

[Lance]

Does the company have to have retained profits to loan money?

Correct but it's creating a commercial loan rather than a directors loan in which case it can go on for as long as he wants. A directors loan has to be paid 9 months after the current tax year he's in.

Is there such a thing?

Maybe it’s me being cynical but I would have thought any company loan to a controlling individual would be classed as a director loan regardless of the terms.
It’s credit without a credit check therefore preferential by its very nature.


Edit: got me thinking now. If I can have a commercial loan like this, I could lend myself £200k of company money, at 1% over a 15 year period instead of bothering with a mortgage. Sounds too good to be true. Is it?

[northernladuk]

I don't think this is needed under 10k right?

Correct but it's creating a commercial loan rather than a directors loan in which case it can go on for as long as he wants. A directors loan has to be paid 9 months after the current tax year he's in.

[jayn200]

You could draw up a simple loan agreement between yourCo and yourself and charge a commercial rate of interest, say base rate + 1%.

I don't think this is needed under 10k right?

[ladymuck]

You could draw up a simple loan agreement between yourCo and yourself and charge a commercial rate of interest, say base rate + 1%.

[cannon999]

Bad ideas aside then yes. It's not due to be paid until the figures have been submitted and calculated.

If you are completely happy you can repay it when it's due and willing to suffer any consequences then fill your boots.

Not the advice I'd give a newbie but as your a seasoned contractor and more than aware of stuff I'd say go for it.

I have liquid assets (~80k or so) which I can use to cover this debt if I am out of contract and in a pinch but my contract is pretty bulletproof.

Thank you for the advice.