Tax free loan taxable ?

Confusion88

I hope I am in the correct forum. My sincere apologies if I'm in the wrong one.

I borrowed 25K which is tax free from a friend with the view to finance a new venture. But the simple loan contact we made makes no reference to the purpose of the loan as he is a old and trusted friend.

Someone told me that I need to pay tax on this loan as a benefit in kind. Others said I do not need to pay any tax on this loan and do not need to declare this in my short self assessment forms. Which is correct ? Your kind clarifcation is greatly appreciated. Thank you.

Ooops !! I just noticed my heading states Tax Free Loan Taxable when I meant to say Interest Free Loan Taxable. Sorry I can't find a way to correct it.

ILW

Is he your employer?

Confusion88

ILW wrote: »

Is he your employer?

No, he's not an employer, he's an old friend living overseas.

paddyrg

How about you structure it as him buying £25k of shares for your company? Keeps it all clean, and you can pay a dividend and/or buy back the shares over time at say £1.10 a share?

Edit - depending on the company structure, etc, he could even get back 40% (if he's paid in in UK tax) from HMRC so his risk is only £15k for your £25k benefit. Talk to an accountant, the structure of this can make a big difference. The scheme I mention is EIS which may/may not be appropriate, but this is why you need a tax advising accountant!

Confusion88

paddyrg wrote: »

How about you structure it as him buying £25k of shares for your company? Keeps it all clean, and you can pay a dividend and/or buy back the shares over time at say £1.10 a share?

Edit - depending on the company structure, etc, he could even get back 40% (if he's paid in in UK tax) from HMRC so his risk is only £15k for your £25k benefit. Talk to an accountant, the structure of this can make a big difference. The scheme I mention is EIS which may/may not be appropriate, but this is why you need a tax advising accountant!

There is no structure. The plans of the venture is still not finalised or if it can proceed at all. And he has no interest in what I do with the loan. It's just a simple personal interest free loan.

I am only confused by whether I need to pay tax on this loan as a benefit in kind and if I need to declare this in my self assessment return.

ILW

It is nothing to do with the taxman, except possibly if your friend is claiming some sort of tax relief on the amount as an investment.

Confusion88

ILW wrote: »

It is nothing to do with the taxman, except possibly if your friend is claiming some sort of tax relief on the amount as an investment.

Wouldn't the taxman see it as part of my income ?

ILW

Confusion88 wrote: »

Wouldn't the taxman see it as part of my income ?

No, but you may have to explain where it came from.

Confusion88

ILW wrote: »

No, but you may have to explain where it came from.

That is no problem as I have a signed copy (by him and me) of a simple personal loan contact after googling for some ideas as how the contact should be.

Thank you so much for your clarification.

paddyrg

Confusion88 wrote: »

There is no structure.

Indeedy! But if there was, you could possibly magic up an extra 10 grand for free...

But if it is just a straight personal loan, no, you don't pay tax on it (on the interest you get whilst it is in the bank, yes, but on the borrowed principal, no)

Confusion88

paddyrg wrote: »

Indeedy! But if there was, you could possibly magic up an extra 10 grand for free...

But if it is just a straight personal loan, no, you don't pay tax on it (on the interest you get whilst it is in the bank, yes, but on the borrowed principal, no)

Thank you so much for your reconfirmation of what ILW said. It is always comforting to know there is a consensus of agreement regarding the tax situation on the loan amount. I'm not worried about the interest earned when the money is in the bank given the low interest rate it is paying on instant access savings or current account.

Thank you also on the EIS scheme and I shall certainly look into this deeper when everything is about to be finalised. Very interesting and I appreciate it very much for pointing me to that direction to consider.