Interest bearing Directors Loans

Interest bearing Directors Loans

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A Director wishes to purchase a property paying the loan off within 3-5 years. This will involve an interest rate of 5% and so it is above the HMRC's rate and therefore not a beneficial loan.

1) Would this avoid self assessment as it is not a beneficial loan?

2) The company will generate an income from the interest and pay tax on this. Does this avoid any other issues with CT?

3) Could this now be report on the balance sheet as a loan separate to directors loans?

Replies (19)

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By johngroganjga
04th Oct 2013 20:00

It would avoid a BIK charge but you ask whether it would avoid self assessment. Whether the individual concerned would be required to submit a tax return is not clear from the facts that you give. All that can be said is that on any tax return he submitted he would not have to return any interest benefit in relation to this loan.

I am not sure what you mean by saying that "the company will generate an income on the interest". The interest paid by the director will it self be income for the company. How it will lead to more income being generated is not clear. Suffice it to say that if the company declares and pays tax on all its taxable income, including the interest it receives on its loan to its director, there will be no corporation tax issues.

Your last question is about the disclosure requirements in the company's accounts. You are obviously aware that loans to directors have to be disclosed. But I don't understand what you mean by asking whether this loan to a director can be disclosed as "a loan separate to directors' loans". That does not make sense. Clearly a loan to a director is a loan to director. You will be aware that loans to each director have to be disclosed separately. Surely that is all that needs to be said.

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By User deleted
04th Oct 2013 20:07

No corporation tax issues, John?

Quite possibly. But if, as is often the case with small companies, the director is also a shareholder - s455.

Yet another example of insufficient information being provided in the question.

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By johngroganjga
04th Oct 2013 20:23

Yes of course but he didn't ask whether s455 was in point - just about interest benefits. Had he asked whether payment of market interest took the loan outside the scope of s455 he would have received an answer on that point also.

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By Duhamel
04th Oct 2013 21:14

Interest level
Just a handy point - if the statutory interest level increases to over 5% in future, there's still no benefit in kind and the loan interest can stay unchanged.

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By User deleted
04th Oct 2013 21:21

Why do you say that, Charlie?

And, John, I was looking at this particular question - The company will generate an income from the interest and pay tax on this. Does this avoid any other issues with CT?

Clearly, payment of tax on the interest does not avoid "other issues with CT" (s455) if it is in point.

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By Duhamel
04th Oct 2013 21:37

Err a lecturer told me so
My notes are at work, so if you'd like further evidence it'll have to wait until Monday I'm afraid. I do remember that the initial rate of interest shows that tax isn't being avoided, so if the market rate moves the beneficial rate can stay the same.
Logically this does make sense, a fixed rate can obtained from a bank that locks in a low rate even when the market rate subsequently increases.
Obviously this only works on the same loan, if a loan is repaid and a new one taken out then you have to start again.

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By User deleted
04th Oct 2013 23:01

Err sounds like you're thinking of s177

I suggest that you look more closely at the conditions in that section, and ask the OP for some more information regarding the loan, before offering the above advice.

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By Duhamel
04th Oct 2013 23:11

Fair enough
But to be honest, there was no chance of that happening at 11pm on a Friday night.

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By User deleted
05th Oct 2013 10:36

Hmmm....

... blaming the time of day for posting potentially misleading advice?

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By naxis
05th Oct 2013 12:10

Thank you for the replies so far and sorry for not including all the right information.

s455 is the question. Is the payment of 25% to HMRC avoided by the loan having a higher rate of interest? Or is there an alternative method to avoid this, such as creating an employer-financed retirement benefit scheme which then makes the loan?

 

This is not about taking income 'tax-free', as the loan will be repaid, but rather a fair method for taking an interest bearing loan from the company without being forced to lend HMRC some money too!

 

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By User deleted
05th Oct 2013 12:18

No

s455, if it is in point, is unaffected by interest paid on the loan.

If you think that you can set up and run a scheme such as you suggest (one that actually works, including subsequent repayment to the company) for less than the opportunity cost of the temporary s455 charge, then good luck to you.

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Replying to johnjenkins:
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By naxis
05th Oct 2013 13:18

I assumed all such schemes were a bad idea, but that's why I am here asking questions. The only stupid question is the one you fail to ask.

At this point I will assume a standard directors loan with s455. At least the 25% given to HMRC is repayable. 

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By Duhamel
05th Oct 2013 20:08

blame?
I expect anyone taking advice from an internet.forum to double check it before advising clients. Next time I hear a handy hint I'll keep it to myself.

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Replying to stepurhan:
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By User deleted
05th Oct 2013 20:30

Quite correct

Charlie_T wrote:
I expect anyone taking advice from an internet.forum to double check it before advising clients. .

The wisdom of doing which is demonstrated by your very own post. But it's something of a lame argument to say that you couldn't be bothered to check if your advice is correct because you expect the readers to check it themselves.

Charlie_T wrote:

Next time I hear a handy hint I'll keep it to myself.

Probably best, it it's inaccurate or misleading

 

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Replying to stepurhan:
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By The Black Knight
17th Oct 2013 11:55

BKD bad hair day?

Charlie_T wrote:
I expect anyone taking advice from an internet.forum to double check it before advising clients. Next time I hear a handy hint I'll keep it to myself.

BKD is having a bad hair day!

You probably had everyone scurrying for their books to find something they had forgotten!

I have no problem with that! Learning is a continuing process and as most of the posts show on accounting web no one knows everything.

It's an accountant thing! Aggressive bunch of Piranhas.

I like my staff to question, keeps me on my toes! and we all learn from the experience.

 

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By Duhamel
05th Oct 2013 20:50

All this over a small hint
BKD, I'll review my notes on Monday and make a final post then. Thanks for making new posters feel welcome.

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By Duhamel
05th Oct 2013 22:52

Piece of mind
After some research, yes it was section 177 ITEPA which is relevant to fixed term and fixed interest rate loans. I fail to see why this led to someone jumping down my throat. I have now discovered the 'ignore' button. :)

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Red Leader
By Red Leader
17th Oct 2013 13:04

@Charlie_T

I'd advise against setting BKD to ignore. His posts are worth reading.

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By Paula Sparrow
17th Oct 2013 13:52

The Interest paid by the director does not eliminate the benefit

unless they can satisfy HMRC that there is a legal obligation to pay interest.  Therefore, you will need to jump through all the hoops to ensure that no benefit charge can be imposed by HMRC.  

I have not seen this point taken in practice, but it is in the HMRC manuals at EIM26257.

If it is a small company and the director is the one who is most likely to draw the income from the company, he is also adding a further layer of tax into his income.  He pays the interest out of taxed income, to be subject to Corporation Tax.  I went through the calculations a while ago with a client, and there was no tax benefit to avoiding the benefit charge and the employer is left exposed to a battle with HMRC over whether the benefit should have been included in the P11d.  This is before we even discuss the Section 455 charge, which is really only a cash flow consideration in any case.  If the company has enough cash to make the loan, then surely the cost benefit is the saving to the director on the rates of interest the bank would charge compared to the loss of interest (1%, 2% maximum) the company is making on interest after Corporation Tax.

In this sort of situation I think it is better to do things the way HMRC are expecting and not risk the hassle of getting into an argument with them.

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