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Loan to director for property investing

My husband and I intend to buy a few buy to let properties over the next few years in our own names (if you replied to my previous posts on this, many thanks, this is the route we choose now). My husband has a limited company he has been operating for the last 5 years which accumulates about £110k in retained earnings. He is working fulltime from last year, so the company is currently dormant (still submitting all the required submissions). He may use it in the future if reverting back to contracting, therefore we have not closed it. My question is can the company lend us the funds to deposit for the rental property ? I understand we have to pay interest to the company but then can claim this via the interest expense of the property. Do you see any problem with HMRC for doing this ?

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No need to charge interest

Since the loan will be for a qualifying purpose, there is no need to pay interest to the company to avoid a chargeable benefit in kind.

However, if the loan remains unpaid more than 9 months after the end of the period in which it is advanced, the company will have a tax liability of 25% of the outstanding amount (said tax being repayable 9 months after the end of the period in which the loan is repaid - or written off)

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Hi BKD,

The loan is intended to be long term (more than 9 months after accounting period). So if we pay the company comparable interest to the bank (4%), can we avoid paying tax of 25% ? Company will then declare this as income and we can claim interest expense on the rental statement ?

 

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No

There are two separate potential charges.

The first is the charge on the employee/director where he/she takes a loan from employer at less than official rate of interest (currently 4%). That charge can be avoided by paying interest on the loan. However, there is no such charge if the loan is for a qualifying purpose, which it is in this case. Hence no need to charge interest.

The second charge, on the company, is all to do with timing and nothing to do with interest paid. If it is outstanding after 9 months then the tax charge (CTA 2010 s455) is applicable. There are certain exclusions from the s455 charge (see s456) but as far as I can tell, none would apply in this case. For the avoidance of doubt - the s455 charge would be repaid to the company at some point - depending on when/how the loan is discharged.

EDITed to correct interest rate

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Agree

The reason the revenue don't allow directors long term loans is you could use them like income and never pay them back. If you choose to take a long term loan they tax it like income although you may be able to claim this back at the point the loan is repaid.

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Correction

The official rate of interest is 4% p.a. if you had to charge it.

BKD - could you clarify what you mean by a "loan for a qualifying purpose"?  Are you referring to the exception set out in s.178(d) ITEPA 2003?  The definition of "qualifying loans" only seems to appear in s.180(5) in connection with the £5,000 threshold for the BIK charge.

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Euan

Don't know where I got 3% from (perhaps I had interest on unpaid tax in mind).

Yes, I was referring to the exceptions noted above.

 

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Many thanks for your advice. Again my accountant said we can borrow from the company without a charge if we pay the company the official rate (4%). Think I really have to sack her.

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Don't sack her .... yet

Just ask her to read this thread and to explain why she disagrees.

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I asked her for the reason of the advice and she said an inspector of tax advised her that on the phone not long ago. Should I doubt an inspector of tax ? Also one more question is if the loan is regarded as income regardless of whether interest is paid, then why would they come up with the official beneficial loan interest rate ? It would not make any difference if the interest is official or not ?

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To clarify some points

Should I doubt an inspector of tax ?

If that Inspector has demonstrated a lack of tax knowledge, then of course you should. In fact, I don't know a single tax adviser that would adopt a particular treatment just because an Inspector said so on the phone.

if the loan is regarded as income regardless of whether interest is paid

The loan is not regarded as income. If the director takes a loan and pays interest at less than a commercial rate (currently determined to be 4% by HMRC) then the director is deemed to have received a benefit equal to the difference. Which is why paying interest equal to at least the official rate avoids the benefit. BUT, where the loan is used for a qualifying purpose, eg purchase of BTL, the benefit rules do not apply, so no interest need be paid.

I'm beginning to think that you should indeed start to look for another adviser. One that (a) knows something about tax and (b) is perhaps better at explaining things than I am ;)

EDIT - I see where the confusion arises, in the post above where someone has suggsted that HMRC tax long-term loans as though they were income. That is not true. If a loan is not repaid within 9 months, then yes the company will suffer a tax charge, which just happens to be the same tax that a 40% taxpayer would have paid on a dividend of the same amount. As already noted, that tax charge - payable by the company - is quite separate from any benefit in kind charge payable by the individual. So, a loan is not treated as income of the individual. (If the loan were to be written off or released, then it would be taxed as if it were income, but that is a discussion for another day.)

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Loan and income

Sorry perhaps my comments were over simplified in that if I own the company and the company incurrs a tax charge through providing me with a loan for BTL then it equates to the same thing in terms of paying the tax either as the company or as the individual as both are from my assets. (although perhaps not on a detailed technical level).

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You should probably wind the company up

If H still qualifies for ER and set up a new company for future trading. But you need to work this out with someone who knows all your personal circumstances.

Chris Smail

www.langer.co.uk

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