Interest-free loans up to 10 000 GBP are exempt from Income Tax and National insurance. But when this amount is exceeded, should company charge interest (on official rate) on whole amount of that loan, or only on amount exceeding 10 000 GBP to not classified this loan as beneficial?
Could you help me in this question?
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This is HMRC guidance:
https://www.gov.uk/guidance/beneficial-loan-arrangements-480-chapter-17
Yes, let's say that borrower is a director of that company and also a shareholder
Would it not be cheaper for him to pay the tax on the notional interest and not the interest itself ?
Not to mention that the company pays Corporation Tax on the interest but the director probably doesn't get tax relief for the interest he pays.
I dunno - it seems like a lose-lose situation to me. What's to be gained here ?
Thank you for your respond.
It is probably true, that in some situation in would be cheaper to just pay tax on benefit in kind, but on the other hand if company charge interest on appropriate amount company will avoid paying National Contribution on it and director won't pay tax, so in total it could be cheaper than tax on interest. In addition interest paid back to company will be it asset.
Anyhow it is more general inquiry to confirm that interest should be rather charge on whole amount of a loan than just on amount exceeding 10 000, because i couldn't find straightforward answer to that.
Thank you for your respond.
It is probably true, that in some situation in would be cheaper to just pay tax on benefit in kind, but on the other hand if company charge interest on appropriate amount company will avoid paying National Contribution on it and director won't pay tax, so in total it could be cheaper than tax on interest. In addition interest paid back to company will be it asset.
Still not seeing the benefits (see what I did there?).
Director pays more money to the company than he would've paid to the taxman. He can draw that back out as a dividend but has to pay dividend tax on it.
It's a hell of a faff to save buttons. If, indeed, you save as much as that.
Yes, let's say that borrower is a director of that company and also a shareholder
"Let's say"?
Their relationship to the company has some slight bearing on the question so it is worrying that you appear to be unsure.
Well, as I mentioned, this is general inquire and not specific case.
Taking that in consideration, by saying "let's say" I meant to implement assumption necessary for answering this question.
My point is that your assumption results in one answer, but a different assumption would result in another.Well, as I mentioned, this is general inquire and not specific case.
Taking that in consideration, by saying "let's say" I meant to implement assumption necessary for answering this question.
That is the problem with general enquiries. You get general answers which you might then apply incorrectly.
To avoid the BIK interest would need to be charged on the whole amount rather than just the element above £10,000.
I have additional question related to my original inquiry.
If I understand correctly 10 000 threshold for beneficial loan is applicable in relation to a single Tax Year, so ones exceeded that exemption won't be due until beginning of subsequent Tax Year.
For example:
1. director take out not-qualifying, beneficial loan of 15 000 GBP from Company in May (exceeding threshold)
2. Repays it fully in August
3. Take out another non-qualifying beneficial loan of 5000 GBP from Company in December
Then loan taken out in December won't be exempt under small loan exemption.
Is that correct?
I have additional question related to my original inquiry.
If I understand correctly 10 000 threshold for beneficial loan is applicable in relation to a single Tax Year, so ones exceeded that exemption won't be due until beginning of subsequent Tax Year.For example:
1. director take out not-qualifying, beneficial loan of 15 000 GBP from Company in May (exceeding threshold)
2. Repays it fully in August
3. Take out another non-qualifying beneficial loan of 5000 GBP from Company in December
Then loan taken out in December won't be exempt under small loan exemption.
Is that correct?
It's not what is outstanding at the end of the tax year, the interest is applied from when the loan is outstanding above £10K.
In your example, interest should be charged from May up until the repayment in August. Then, on the £5,000 in December no interest would need to be charged.
Thank you once again.
One last uncertainty that I have:
If in my example first loan taken out in May (15 000 GBP), would be partially repaid in June on the amount of 8000 GBP, so sometime in June amount outstanding would be 7000 GBP, in that scenario, to avoid BIK, interest should be charge from May upto June, or from May up until full repayment?
This is beginning to sound (a lot) like a software developer trying to work out the specification for something?
If so, you would be a lot better off reading the underlying legislation ... not just because you can't guarantee the accuracy of the (generally reliable) opinions on this forum, but also because you don't seem to know enough to know what else you need to know (unknown unknowns and all that).
Thank you for that suggestion.
I have read most of I could find so GOV manuals, parts of ITEPA 2003, ITTOIA 2005 and CTA 2010. I have to admit that not all of information are crystal clear to me, thus my questions on this forum.
I would really appreciate if you could point out reliable sources that could help answer to my question above (please don't get me wrong, I am not trying to be rude, that is actually sincere request)
Well if you *are* a software developer you could always try getting in contact with SDST (Software Developers Support Team) at HMRC, or with one of the unaffiliated groups in the private sector (such as BASDA).
My point is that you will need a constant channel as more and more questions arise + groups that specialise in software development are more likely to know when to point out an obvious omission in your approach (even when not obvious to you).