The client wants to refinance his home loan and obtain additional monies ( at a very low interest rate) as a cheap source of finance .The additional funds ( say £250,000) will be paid into his newly formed ltd co where he is sole director . Co will then purchase commercial property that will generate rental income . The co will pay corpn tax tax on its rental income profit each year . Queries are :
1) He wants to get tax relief on the interest paid ( say £3,000 per annum paid personally to the lender on £250,000 ) .My understanding is that the co can pay him loan interest £3,000 gross ( net of £2,400 ) accounted for on the CT61 return . On his personal tax return , he will show interest received of £3000 ( with £600 tax credit) .Can he then offset the £3,000 loan interest paid personally to the lender so that there is no tax liability ?????
2) Loan interest of £3,000 will be paid as an annual sum by the ltd co to the director . Can the company declare it on one CT61 return at the end of the year ?? Does quarterly accounting of CT61 returns mean that there would have to be 3 other 'nil' returns in the year ????
3) The monies paid into the co of £250,000 will be shown as a loan from the director in the accounts ( and repaid on exactly the same terms / interest as being done personally by the director ) . Effectively , the whole loan transaction is being carried out personally by the director on behalf of the company - because of cheap finance at low interest rate.
4) In a few year's time the director expects the property to have appreciated . Upon a disposal , the co will pay corporation tax on any gain . Any surplus monies left in the company (after full repayment of loan) will be drawn out by the director as dividends over a period of time so as to fully utilise his personal tax basic rate band.
5) the co also intends to issue some shares to the wife and other family members in the future - so as to minimise paying income tax at higher rate on dividends drawn out of the company .
Can anyone see any problems from the HMRC on this ???
All comments will be appreciated .
Thanks
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Some answers
As he has borrowed money to invest in his personal company, the interest payable on his borrowings is qualifying interest for which he can claim a tax deduction (up to the lower of his borrowing and his investment in the company) on his personal tax return. This is regardless of whether the company pays him interest on his investment in the company, but if it does, he must disclose the interest income on his tax return.Tax at 20% is deductible from interest only when it is paid. The company would have to submit a form CT61 for the quarter in which the interest is paid and pay over the tax deducted. There is no requirement to submit a nil CT61 return if no interest has been paid in the quarter.What is the question? You should realise that the two loans are quite separate. The first is a loan to him personally by a generous lender; the second is a loan by him to the company.What is the question? It seems a reasonable plan.Yes. The additional shares for the family members should be issued at the outset before the commercial property is bought and there is any value in the company.
Hello Euan,
Thank you for your response.
1) Interesting to note on point 1 that the director can claim a tax deduction on his personal tax return even though the ltd co does not pay him any loan interest .This may reduce the admin burden of submitting a CT61 return.
Your comments are helpful. Thank you again
£3,000 interest on £250,000 loan seems low
At 1.2% this is a bargain! Sounds too low, I'd check the figures!
Effective tax relief.
Whether the director will get any effective tax relief will depend upon his income level - and the nature of his income in the tax years when he incurs the £3,000 (or higher?) interest per annum.
If the director has say £7,488 pa salary then a dividend top up (and no other income) he might get NO effective basic rate tax relief (but could reduce higher rate tax on the dividends if they were high enough).
This is why in many cases interest is actually paid (and CT61 form necessary). If interest was paid this can be done once a year (say March annually) instead of a more burdensome quarterly (from a CT61 viewpoint).
So, the question to be answered in considering whether it is beneficial for the company to pay the interest or not to the director is "what's the director's total income, how amount per category of income?".
Thank you for your comments,DMG Bus . I think the interest rate is base rate + 1% on a variable mortgage .Still quite generous .
The limited co is an investment by the director whose main income is on Paye in the IT sector and he is a higher rate taxpayer.His intention is to build up funds in the company over a period of 7-10 years when he intends to retire from his employment .At this point he expects surplus funds in the co ( upon sale of property and repayment of loan ) that he can drawn out as dividends as he will be a basic rate taxpayer. The big assumption is that the property will have appreciated and sold at a profit !!!