Company money to pay personal mortgage

Bookworm105

Grumpy_chap said:

strawb_shortcake said:

I've wondered how these director loans work, I know someone who runs a business with another director, each year a director loan is on their accounts, both the same amount and repaid at identical levels. The latest loan is just shy of £100k - why would they do this is if it creates a BIK at this level? 
I'd naively assumed it was a different way of taking their income? 

Is it a Director's Loan where the company lends money to the individual or a Director's Loan where the individual is lending money to the company?  

the Directors Loan Account records both money loaned to the company and money borrowed from the company by rhe director (Each director has their own individual DLA)

The net balance on the account will indicate who owes whom.

Bookworm105

born_again said:

As business would then own the house, what would happen if the company went bust?

rubbish, Legal ownership has not changed just because someone else paid off the loan on it. 

Bookworm105

strawb_shortcake said:

I've wondered how these director loans work, I know someone who runs a business with another director, each year a director loan is on their accounts, both the same amount and repaid at identical levels. The latest loan is just shy of £100k - why would they do this is if it creates a BIK at this level? 
I'd naively assumed it was a different way of taking their income? 

ask them?
100K balance unpaid after 9 months incurs the charges already explained. Corporation tax on the company and NIC and BIK on the individual.
There are now rules in place addressing "bed and breakfasting" the o/s balance to ensure that it is "actually" repaid to prevent the 10k limit being abused year on year ; 

Bookworm105

Jaco70 said:

I still can’t see how a simple loan, repaid with interest, is dodgy, or harms anyone other than losing the current mortgage lender a few quid in interest, but I’m pretty sure you’re correct and that this will be a non-starter. Which feels like a shame.

it is not a "simple" loan.
You as its director do not have to be subject to normal financial assessment  by the company before it agrees to lend you money, ie you control it and you set the terms of the loan. 

if you choose to borrow from the company and are willing to pay interest to the company at the Official Rate (using either the average or precise method to calculate the amount to pay based on balance owed) then, and only then can you escape being charged the BIK on you personally.
the company nonetheless has to pay the Corporation Tax charge ("S455") at 33.75% on the o's balance if it remains above £10k o/s 9 months after the YE. That tax can be reclaimed by the company if, at a later date, the director repays the loan balance in full.

Rates and allowances: beneficial loan arrangements - GOV.UK (www.gov.uk)

so, if you want to borrow money from your company you can pay interest to it at the official rate and escape personal income tax. You will land your company with a large CT bill, but if you (eventually) repay the entire amount that CT could be refunded to the company (eventually).

Your company does not exist as a pool of money you can dip into without consequence.

Jaco70

Bookworm105 said:

Jaco70 said:

I still can’t see how a simple loan, repaid with interest, is dodgy, or harms anyone other than losing the current mortgage lender a few quid in interest, but I’m pretty sure you’re correct and that this will be a non-starter. Which feels like a shame.

it is not a "simple" loan.
You as its director do not have to be subject to normal financial assessment  by the company before it agrees to lend you money, ie you control it and you set the terms of the loan. 

if you choose to borrow from the company and are willing to pay interest to the company at the Official Rate (using either the average or precise method to calculate the amount to pay based on balance owed) then, and only then can you escape being charged the BIK on you personally.
the company nonetheless has to pay the Corporation Tax charge ("S455") at 33.75% on the o's balance if it remains above £10k o/s 9 months after the YE. That tax can be reclaimed by the company if, at a later date, the director repays the loan balance in full.

Rates and allowances: beneficial loan arrangements - GOV.UK (www.gov.uk)

so, if you want to borrow money from your company you can pay interest to it at the official rate and escape personal income tax. You will land your company with a large CT bill, but if you (eventually) repay the entire amount that CT could be refunded to the company (eventually).

Your company does not exist as a pool of money you can dip into without consequence.

I realise it isn't without consequence, that's why I asked the question.

That's a very informative answer, but I have a few questions.

1). What does 'official rate' mean? Who sets that and what rate is it? I don't actually know what interest rate I'm paying on my mortgage, but could easily check.

2). Unless I'm missing something (entirely possible), any interest I pay goes to my company anyway, rather than to a lender, so I can't  readily see how I lose out there. I pay the interest, but the company I own receives it. Even if CT has to be paid on the interest, its only 25% of it, whereas now the entirety of the interest I pay disappears into the ether.

3). The most important one. What exactly is the company paying CT on? Why would money exiting the company in the form of a loan to someone, be treated in the same way as trading profit? 

I realise these questions are simplistic to some, but I'm a builder, so to me its all a learning curve.

Inbetweeners

Jaco70 said:

Bookworm105 said:

Jaco70 said:

I still can’t see how a simple loan, repaid with interest, is dodgy, or harms anyone other than losing the current mortgage lender a few quid in interest, but I’m pretty sure you’re correct and that this will be a non-starter. Which feels like a shame.

it is not a "simple" loan.
You as its director do not have to be subject to normal financial assessment  by the company before it agrees to lend you money, ie you control it and you set the terms of the loan. 

if you choose to borrow from the company and are willing to pay interest to the company at the Official Rate (using either the average or precise method to calculate the amount to pay based on balance owed) then, and only then can you escape being charged the BIK on you personally.
the company nonetheless has to pay the Corporation Tax charge ("S455") at 33.75% on the o's balance if it remains above £10k o/s 9 months after the YE. That tax can be reclaimed by the company if, at a later date, the director repays the loan balance in full.

Rates and allowances: beneficial loan arrangements - GOV.UK (www.gov.uk)

so, if you want to borrow money from your company you can pay interest to it at the official rate and escape personal income tax. You will land your company with a large CT bill, but if you (eventually) repay the entire amount that CT could be refunded to the company (eventually).

Your company does not exist as a pool of money you can dip into without consequence.

I realise it isn't without consequence, that's why I asked the question.

That's a very informative answer, but I have a few questions.

1). What does 'official rate' mean? Who sets that and what rate is it? I don't actually know what interest rate I'm paying on my mortgage, but could easily check.

2). Unless I'm missing something (entirely possible), any interest I pay goes to my company anyway, rather than to a lender, so I can't  readily see how I lose out there. I pay the interest, but the company I own receives it. Even if CT has to be paid on the interest, its only 25% of it, whereas now the entirety of the interest I pay disappears into the ether.

3). The most important one. What exactly is the company paying CT on? Why would money exiting the company in the form of a loan to someone, be treated in the same way as trading profit? 

I realise these questions are simplistic to some, but I'm a builder, so to me its all a learning curve.

1) Official rate is set by HMRC and is currently 2.25% but could easily increase given the current BOE base rate. 2.25% of the loan becomes a taxable benefit on you.
2) Maybe so but the CT paid by the company needs to be factored into the overall 'cost'
3) The company needs to pay 33.75% on the balance of any participator loans that remain outstanding at the end of the accounting period.

Hoenir

Comprehensive guide here. 

https://www.gov.uk/directors-loans

Bookworm105

Jaco70 said:

Bookworm105 said:

Jaco70 said:

I still can’t see how a simple loan, repaid with interest, is dodgy, or harms anyone other than losing the current mortgage lender a few quid in interest, but I’m pretty sure you’re correct and that this will be a non-starter. Which feels like a shame.

it is not a "simple" loan.
You as its director do not have to be subject to normal financial assessment  by the company before it agrees to lend you money, ie you control it and you set the terms of the loan. 

if you choose to borrow from the company and are willing to pay interest to the company at the Official Rate (using either the average or precise method to calculate the amount to pay based on balance owed) then, and only then can you escape being charged the BIK on you personally.
the company nonetheless has to pay the Corporation Tax charge ("S455") at 33.75% on the o's balance if it remains above £10k o/s 9 months after the YE. That tax can be reclaimed by the company if, at a later date, the director repays the loan balance in full.

Rates and allowances: beneficial loan arrangements - GOV.UK (www.gov.uk)

so, if you want to borrow money from your company you can pay interest to it at the official rate and escape personal income tax. You will land your company with a large CT bill, but if you (eventually) repay the entire amount that CT could be refunded to the company (eventually).

Your company does not exist as a pool of money you can dip into without consequence.

I realise it isn't without consequence, that's why I asked the question.

That's a very informative answer, but I have a few questions.

1). What does 'official rate' mean? Who sets that and what rate is it? I don't actually know what interest rate I'm paying on my mortgage, but could easily check rather than expect them to write out facts that are there for the reading.

2). Unless I'm missing something (entirely possible), any interest I pay goes to my company anyway, rather than to a lender, so I can't  readily see how I lose out there. I pay the interest, but the company I own receives it. Even if CT has to be paid on the interest, its only 25% of it, whereas now the entirety of the interest I pay disappears into the ether.

3). The most important one. What exactly is the company paying CT on? Why would money exiting the company in the form of a loan to someone, be treated in the same way as trading profit? 

I realise these questions are simplistic to some, but I'm a builder, so to me its all a learning curve.

1. when someone replies please have the decency to read the link they give to support what they said 

2. yes, your company earns taxable interest so its distributable reserves available for you to take should increase if it remains profitable in its normal activity. It may be a technical risk you'll ignore, but also make sure the company is complying with company law in that its articles allow it to make such a loan in the first place.

3. read Director's loans: If you owe your company money - GOV.UK (www.gov.uk) it isn't treated like trading profit, it is its own part of CT legislation and is called Section 455 tax in recognition that as controller of the company you could do all sorts of things with company money if rules were not place to control it.
S455 tax rate is effectively the same as if you had taken the money as dividend subject to higher rate personal tax. the value of the company (and thus your net worth as its shareholder) is reduced by an amount equivalent to what you'd have paid in personal tax.
If the loan is paid off, then that s455 is refunded leaving the Govt with the "benefit" of the BIK you paid whilst it was o/s. If you don't then it isn't refunded and govt keeps the S455 money as cash it would have got had you been taxed on it as a personal drawing, but always at the higher rate (so penalising directors who are basic rate taxpayers in their personal affairs)

in summary:
- s455 CT for the company @ 33.75% of the loan balance (reclaimable by company if loan repaid in full)
- BIK for you personally @ your marginal income tax rate on the interest rate difference (official rate - any interest you pay)
- if interest paid is lower than the official rate, or no interest on the loan is paid, or it is paid late, (or loan is never repaid ie is written off) - Class 1A NI 13.8% payable by you personally on the balance 

https://www.theaccountancy.co.uk/wp-content/uploads/2023/07/Directors-loans-guide.pdf

NIM16678 - Class 1A National Insurance contributions: Special Class 1A NICs cases: Beneficial loans: Directors’ loan accounts: Overdrawn loan accounts: General - HMRC internal manual - GOV.UK (www.gov.uk)

NIM16679 - Class 1A National Insurance contributions: Special Class 1A NICs cases: Beneficial loans: Directors’ loan accounts: Overdrawn loan accounts: Example - HMRC internal manual - GOV.UK (www.gov.uk)

xnoxxnox

Draw up loan agreement. Invariable interest rate, invariable amount, invariable duration, no ability for early repayment. Pay interest at more than HMRC preferential loan interest rate. I.e. more than 2.5% (which for the company will be income).

However not sure you will gain much. Such loans are not allowable business expense - thus realistically you can only lend out distributable profits. As net position is that you are still paying interest on the same size of loan. And in the end even more money ends up in the company. Eventually if income and assets of company result it it being reclassified as passive income, it will become even more expensive to take dividends of it.

Get the loan agreement wrong, and one has to deposit additional corporation tax, and BIK NIC payments, wiping off any interest differential benefit.

Also check your mortgage terms, as your mortgage may not allow repaying mortgage with a directors loan.

Overall you may at most save 3% on mortgage interest, or can get stung with 40%+ additional tax. The amount of additional paperwork is a lot - as corporation tax will have additional filings and so will self assesment. And cost of doing that alone may not outweight the interest differential.

Declare dividends and pay down mortgage.

saajan_12

Jaco70 said:

Bookworm105 said:

Jaco70 said:

I still can’t see how a simple loan, repaid with interest, is dodgy, or harms anyone other than losing the current mortgage lender a few quid in interest, but I’m pretty sure you’re correct and that this will be a non-starter. Which feels like a shame.

it is not a "simple" loan.
You as its director do not have to be subject to normal financial assessment  by the company before it agrees to lend you money, ie you control it and you set the terms of the loan. 

if you choose to borrow from the company and are willing to pay interest to the company at the Official Rate (using either the average or precise method to calculate the amount to pay based on balance owed) then, and only then can you escape being charged the BIK on you personally.
the company nonetheless has to pay the Corporation Tax charge ("S455") at 33.75% on the o's balance if it remains above £10k o/s 9 months after the YE. That tax can be reclaimed by the company if, at a later date, the director repays the loan balance in full.

Rates and allowances: beneficial loan arrangements - GOV.UK (www.gov.uk)

so, if you want to borrow money from your company you can pay interest to it at the official rate and escape personal income tax. You will land your company with a large CT bill, but if you (eventually) repay the entire amount that CT could be refunded to the company (eventually).

Your company does not exist as a pool of money you can dip into without consequence.

I realise it isn't without consequence, that's why I asked the question.

That's a very informative answer, but I have a few questions.

1). What does 'official rate' mean? Who sets that and what rate is it? I don't actually know what interest rate I'm paying on my mortgage, but could easily check.

2.25% - it's there if you read the link 

Jaco70 said:

2). Unless I'm missing something (entirely possible), any interest I pay goes to my company anyway, rather than to a lender, so I can't  readily see how I lose out there. I pay the interest, but the company I own receives it. Even if CT has to be paid on the interest, its only 25% of it, whereas now the entirety of the interest I pay disappears into the ether.

That's more money going into the company, so to eventually extract it as yours you have to pay some kind of tax again on that. Say for every £100 interest you'd otherwise give your lender, 
* £25 goes to corporation tax
* leaves £75 extra in the company, which you pay 40% / 33.75% income or dividend tax on, ie £25-30
* leaves £45-50 extra in your pocket

Plus your loses the interest it would have earned in a business savings account.  

Jaco70 said:

3). The most important one. What exactly is the company paying CT on? Why would money exiting the company in the form of a loan to someone, be treated in the same way as trading profit? 

I realise these questions are simplistic to some, but I'm a builder, so to me its all a learning curve.

Its not the usual 25% corporation tax, its 33.75% ie effectively the same as what you'd pay as a dividend tax. The rationale is they don't want to wait indefinitely in case you don't actually repay the money and keep the money tax free. It looks and smells like a dividend so lets tax is as such, and then if it turns out that the money is repaid then the tax can be claimed back. The only reason that the company is paying instead of you is if you're borrowing then you won't have a third of the amount for tax, so you'll just borrow more and they'd charge the 33.75% on higher borrowing, which feels punitive.