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Directors Loan from his Company

A director wishes to take a loan of £30,000 from his company and repay this with monthly payments of £500 each.

Does this qualify as a benefit in kind? He already draws salary and dividends up to the limit before entering the higher rate tax.

What is the most tax efficient method of extracting this money legally from the company?

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11th Nov 2010 10:31

Basic rules

I assume that the director is a shareholder.

The company will have to pay s.455 (I think - it used to be s.419) tax at 25% of the balance outstanding 9 months after the company's year-end, i.e: when the corporation tax is due.  This tax is refundable to the extent that the loan has been repaid in each subsequent accounting year, again 9 months after the end of each year.

It is a BIK if the director does not pay interest of at least the official rate, currently 4% p.a., to the company.  The value of the benefit is the amount by which 4% exceeds any interest actually paid.  This must be reported on form P11D for the tax year.  There is no BIK when the loan falls below £5,000, i.e: it does not exceed £5,000 in the tax year.

Not sure what you mean by extracting this money from the company, legally or otherwise.  It is a loan which he intends to repay.

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11th Nov 2010 13:26

An interest-bearing loan is probably the best

Again, assuming an owner-director.

If the company and director can afford a little more expense up-front then the best method is as follows:

Get a written agreement between him and the company for a loan of £30k at 4% interest over 5 years - this will ensure no benefit-in-kind to push him into the higher tax band.

This will mean repayments of £552.50 a month with interest totalling £3,150

However that £3,150 is taxable income for the company which can then be returned, less corporation tax, via dividends which means that the actual long-term cost is between £650 and £1,050 (depending on the corporation tax rate applicable).

There will also be the extra corporation tax charge of up to £7,500 - however this will eventually be refunded back to the company over several years as the loan is paid back.

With the interest on the loan returned to the director via dividends the effective rate of interest could be as low as 0.8%

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By k whyte
11th Nov 2010 22:06

Loan to a director

Can you detail how you calculated the interest of £3150 for the 5 years?

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12th Nov 2010 12:39

PMT function in Excel

I used the PMT function, with a rate of 4% a year over 5 years - this gave me monthly repayments of £552.50, or total interest over the period of £3,150 (ok actually £3,149.74)

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