Director's Loan to Ltd company - Are finance costs tax deductible in this scenario?

wotnott

If I take out a mortgage in order to lend money into my Ltd company via a Director's Loan, the finance costs are tax deductible since they are for business purposes.

If the company then uses the money to buy an asset (property) from me as an individual, does this change the tax treatment of the finance costs in any way? My concern is that the flow of funds is circular: I lend the money to the company, which pays it to me.

I don't know of anything to say that costs are not allowable here, but don't want to get caught out.

prowla

Sounds dodgy to me...

wotnott

Thanks @[Deleted User]. That is the first really factual, detailed and insightful response I have managed to get to the question (and I posted it on an accounting forum before this one without success).

For what it's worth, the finance costs referred to are mine (on the mortgage mentioned in the first sentence). I concur with your comment on 'qualifying loan' vs 'business purposes'. That was a sloppy description on my part. I would question your point about a loan into a close investment-holding company being precluded, though. The restriction is on "interest on a loan to buy an interest in a ‘close investment-holding company’". Surely not the same thing? That restriction is on a buying into a company, not lending to it.

wotnott

It does, but that is an 'or'. That section states:

lending to such a company money which is used wholly and exclusively—
(i)for the purposes of the business of the company, or
(ii)for the purposes of the business of any associated company of the company which is also a close company that is not a close investment-holding company...

If it is for the purposes of the business of the company, there is no need to get to point (ii). The condition is already satisfied. According to my reading of it, the 'not a close investment-holding company' refers specifically to any associated company, not the company itself.

dharm999

Assuming this all works out to be ok from a tax point of view, then isn’t there also the option to pay the interest on the loan you make to the company when it’s most advantageous to your personal tax situation?  If the company does its accounts on an accruals basis, then it accrues the interest each year, so gets the deduction for tax purposes, but only actually pays it to you when you are a lower rate tax payer.  Happy to be corrected, if I’m wrong.

masonic

wotnott said:

It does, but that is an 'or'. That section states:

lending to such a company money which is used wholly and exclusively—
(i)for the purposes of the business of the company, or
(ii)for the purposes of the business of any associated company of the company which is also a close company that is not a close investment-holding company...

If it is for the purposes of the business of the company, there is no need to get to point (ii). The condition is already satisfied. According to my reading of it, the 'not a close investment-holding company' refers specifically to any associated company, not the company itself.

As has been pointed out above, s392(2)(b)(i) applies to "a close company that is not a close investment-holding company" by virtual of the inclusion of the word "such" in (b), meaning that "such a company" is that defined in (a). The addition of s392(2)(b)(ii) extends coverage to associated companies which themselves also meet those criteria.

wotnott

Thanks for the clarification. I see what you mean.