interest deductibility

interest deductibility

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client draws down £30k from offset mortgage and lends it to his company in order to enable the company to purchase equipment costing £30k

He will claim the interest paid on the £30k on his personal tax return as qualifying interest
But when he makes repayments on his mortgage I assume the repayments have to be prorated between the business and personal element as opposed to treating the repayments as wholly personal which would increase the interest claim over time

nick farrow

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By User deleted
28th Apr 2006 13:44

Watch hidden NIC costs
In the case of a director not being liable at higher rate tax and whose only income is salary plus dividends, the only way there'll be income tax relief on the interest paid will be by incurring NIC costs.

This is because deducting the interest paid from dividends gets no tax relief (unless a higher rate taxpayer); deducting the interest from salary requires the salary to be above Personal Allowance (=NIC limit) to get tax relief.

In such circumstances (say salary £5035, rest of income is dividends), it would be advisable for the company to pay interest to the director to create an income liable to IT but not liable to NIC from which tax relief on interest paid can be claimed.

If the company does pay interest to the director then the quarterly CT61 procedure with tax deduction at source is required.

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By User deleted
28th Apr 2006 15:10

First in first out
According to property tax specialist lecture I recently attended, as long as there is a balance of £30k left then all repayments can be treated as against original loan and pro-rata treatment is not necessary. Repayments clear existing debt before you start paying off the newly drawn £30k

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By nick farrow
28th Apr 2006 15:27

interesting
Mark thanks for your comments

I intended for the company to pay interest to the client to offset the interest claim

The client takes a salary of £12,000 a year and receives dividends which put him well into the 32.5% bracket

He also pays pension contributions personally (for the time being)of about £8k - is it right that under the new post A day regime that even where the NRE (is that term still relevant?) are very low, tax relief is obtained on the dividend income by the mechanism of extending the BR band

I believe that there are circumstances when the CT61 procedure is not needed is it do with "short interest" and/or when the interest paid by the company exact matches the interest paid by the recipient

I always thought that paying a salary in some circumstances of exactly the PA is slightly provocative

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By User deleted
02nd May 2006 13:24

Further comments
(1) CT61 - "short" or "long" interest : I am aware that tax deduction is not required in one of these definitions - but never seen a straight forward definition ! - in all cases I have seen in recent years tax HAS been deducted

(2) Pension scheme - an added complication, as so often is the case, "cramping our style" re: tax & NIC mitigation - never seen or heard a "straight answer" from a purveyor of pensions on this one

(3) Low salary provocative or not - may be it is ! However, if (as I guess) most other advisors are also advising their clients to take personal allowance level salaries, and I were to recommend say £6000 to be "not provocative", couldn't the client later choose a new advisor who could say tax & NIC unnecessarily paid on the £965 over & above the personal allowance ? I can see a potential issue with the low salary in the context of husband & wife companies (ie. ongoing Arctic Systems case) but otherwise I still recommend £4368 to £5035 level for 2006/07

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By nick farrow
02nd May 2006 15:32

many thanks Andy & Mark for your comments

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By ACDWebb
27th Apr 2006 15:48

An offset mortgage
is surely going to make things very difficult as the balance will be constatntly changing.

Can the mortgage company identify the new business loan in a seperate pot and only make the offsets to the main pot to leave the business element untainted?

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By nick farrow
27th Apr 2006 16:12

thanks Alan
if the separate "pot" is not possible I will use a fair & reasonable approtionment

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