Directors loan accounts

Directors loan accounts

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Owner/director of close company wishes to take out £100k loan but intends to pay it back before the accounting year end (march 31 2015) presumably this will incur 4% benefit in kind charge on 2014-2015  P11D from november 1 to april 5th.Presumably there will be no other charges as long as it is repaid before March 31 2015?If I am missing anything would appreciate your thoughts.

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By User deleted
30th Oct 2014 14:43

Almost correct

Current rate is 3.25%

Assume he is not paying interest to the company?

Assume the loan is not for a qualifying purpose?

If the loan is taken out on 1 November 2014 and repaid on or before 31 March 2015, it will have been in place for only 4 whole tax months. (Using the normal method - HMRC or the taxpayer can choose a daily method if it is to their benefit.)

 

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Euan's picture
By Euan MacLennan
30th Oct 2014 14:37

You are missing two things
The official rate of interest went down to 3.25% p.a. from 6 April 2014.If he actually pays the interest at 3.25% p.a. - about £1,350 - there will be no BIK.

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Portia profile image
By Portia Nina Levin
30th Oct 2014 14:57

11/12ths

By the default method the benefit is calculated by taking the average loan balance and multiplying it by 1/12th of the official rate (3.25%) for each complete tax month that the loan is outstanding (ie 4 complete tax months = £100,000 x 3.25% x 4/12ths.

If you do not borrow until after 6 November and/or repay before 5 April, the number of complete tax months reduces by 1, she says, stating the bleeding obvious.

So that is a saving of £100,000 x 3.25% x 1/12th. Say thank you Portia!

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By User deleted
30th Oct 2014 15:08

Thank you Portia!

At 40%, that's a tax saving of just over £100. Hardly enough to get HMRC excited (though I suppose they might just think about applying the exact method if the loan is repaid just before 5 April, since almost 2 months (£200) will have dropped out).

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By User deleted
30th Oct 2014 17:22

Precision precision

Actually, Basil, re your first point "and/or" should simply be "and". The OP has already indicated that the loan will be repaid before 5 April. (Strictly, the "and" isn't required either but Portia is just stressing that that variable is unchanged..

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By User deleted
30th Oct 2014 23:10

You are quite correct, Basil

Simply removing the "and" results in nonsense - what I meant was that there was no need to refer to repayment before 5 April because that had already been established.

Accepting that this is all light-hearted, and intending no offence, Portia talks about a reduction in the number of complete months. A reduction compared to what? She talks about deferring borrowing until after 6 November, thus reducing the number of complete months by 1.

And then repayment of the loan before 5 April. But by that date rather than when? On or after 5 April? But there was never any suggestion that the loan would be repaid as late as that - the OP clearly implies that the loan will be repaid by 31 March. So, based on the original dates proposed by the OP (1 November and 31 March), and using that as the reference point, the correct statements would be:

"If you do not borrow until after 6 November [rather than 1 November] or repay before 5 March [rather than 31 March], the number of complete tax months reduces by 1"

or

"If you do not borrow until after 6 November [rather than ...] and repay before 5 March [rather than ...], the number of complete tax months reduces by 2"

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By User deleted
31st Oct 2014 08:25

My comments ...

.. were based on the OP's statement that the loan would be repaid by 31 March, and therefore suggested what the correct statements ought to have been with reference to that information.

In Portia's first paragaph, in her calculation, she clearly expects that the loan would indeed be repaid before 5 April (since she has arrived at 4 being the number of complete tax months). So both she and I have taken notice of the information provided by the OP. I doubt (though could of course be mistaken in my assumption) that Portia would then follow this with a comparative statement made with reference to some other scenario rather than the one that she had just based her calculation on.

One may of course choose to disregard pertinent information and throw in all kinds of theoretical assumptions, which could lead to any number of possible interpretations and outcomes. A rather pointless exercise in my opinion - much like this discussion.

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