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How to deal with director loan to own company?

Director loans funds to his company to buy a property. How is capital and interest dealt with?

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The director has made an unsecured loan to his close company to buy an investment property. Main income of property is residential rent. Main expense is interest on the loan from the director. Repayments are flexible allowing director to take capital repayments and/or interest as the company can afford it. I am struggling with the logic of how to deal with capital and interest repayments.

So for example initial capital loan is £250,000 and interest rate is 5% per annum. At end of year 1 the interest is charged of £12,500.  If the director is paid the interest directly then the company must deduct income tax at 20% and report on a CT61 Return. As I understand it a repayment of capital would not suffer any income tax deduction. 

So if the director took a £12,500 capital repayment and the £12,500 interest was rolled up into the loan as capital does that mean the director could take capital repayments ad infinitum without ever having to deduct income tax? Or should the interest charged be credited to a seperate director's loan interest account and everytime this account is reduced then income tax paid on the distribution? I suspect the latter but it would be good if someone could definitely confirm this is how it should be done.

Thanks all.

Replies (19)

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By Paul Crowley
28th Nov 2021 13:11

Think about this in both directions.
Is company looking for tax relief, but director not intending to declare the interest on his tax return?

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Replying to Paul Crowley:
DougScott
By Dougscott
28th Nov 2021 13:42

No one is trying to avoid any tax here, I want to know what the correct accounting is.

Another example. Take the £12,500 loan interest - the director decides to take only £8000, and the remaining £4500 is capitalised into the loan. The company will pay the director £6400, and deduct £1600 income tax which is paid over to HMRC and reported on a CT61. The director only reports the gross interest actually paid to him on his Tax Return (ie £8000) and may or may not be able to reclaim the £1600 depending on his other taxable income. It is my understanding that the company only deducts income tax on distributions actually paid and the director only declares gross interest actually received. Maybe what should happen is that the £4500 should not be credited to the loan account but should be credited to a seperate account that is only subject to income tax if it is drawn (or transferred to the director's current account)? If that is the case what should one call this accumulted interest account?

To me this seems

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Replying to Dougscott:
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By Wanderer
28th Nov 2021 14:00

Edit: misread.

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Replying to Dougscott:
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By Paul Crowley
28th Nov 2021 14:01

To me the correct accounting is:
interest shown on company equals interest shown on tax return
CT61 once a year on either paying or making available the interest by crediting ANY DLA
CT61 unless the interest is accrued NOT made available to a DLA
Imagine trying to separate the tax deducted from the interest on the tax return
Just asking for an enquiry

Best is to keep it simple and direct
Company tax relief equals directors tax return equals CT 61
Any variation looks deliberate and contentious

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paddle steamer
By DJKL
28th Nov 2021 13:26

Think about what is payment, at end of year one if you credit his account with the interest and next year's interest if calculated on the new higher figure, absent any repayments made, then the interest has effectively been paid, the CT61 is in play whether he withdraws the interest or not.

A careful read of the loan agreement is probably very advisable.

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Replying to DJKL:
DougScott
By Dougscott
28th Nov 2021 13:53

How about "Interest due on the loan will be calculated annually based on the daily balance outstanding on the loan throughout the preceding year. The Lender may choose to draw down part, none or all of the annual interest due with any undrawn amount being added to the loan principal" and "The payment of the annual capital repayment may be deferred by the Lender, however the total loan balance must be repaid to the Lender no later than 1st April 2040 or loan terms renegotiated".

The CT61 only relates to actual payments to the director (or credit to his current account) as fas as I am aware?

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Replying to Dougscott:
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By Paul Crowley
28th Nov 2021 14:07

"The CT61 only relates to actual payments to the director (or credit to his current account) as fas as I am aware?"

Disagree
ANY DLA
To keep out of CT61 accrual only
Allocate the accual and it is available

This comes over as your idea not client's
The tax deduction is trivial as director gets the benefit anyway

No point in any of this unless you are looking to delay the personal tax compared with tax relief in the company

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By zebaa
28th Nov 2021 13:28

You need to keep records of interest & capital repayment, not mix the two. You could keep a record of all directors loans & pay interest on the total, unless there is some agreement on differing interest rates for different loans. When the company pays the director it should be clear what that payment is for. Tax consequences follow.

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By Tax Dragon
28th Nov 2021 15:45

You're suggesting that at the start of the year the debt is £250k, at the end of the year the debt is £250k; that during the year a) the lender charges £12,500 interest and b) debtor pays the lender £12,500; and that the lender isn't taxable on that £12,500.

Good luck getting HMRC to agree that. The courts wouldn't.

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By Calculatorboy
28th Nov 2021 16:49

It all falls out of the loan agreement, its quite simple.

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By Hugo Fair
28th Nov 2021 17:51

And on a completely unrelated point (to all the other valid responses) ... "interest rate is 5% per annum".
I'm not in the business of borrowing money to invest in buy-to-let residential property, but a quick scan via Google indicates a typical current rate of around 1.9% - so what is the logic behind the Director receiving such a higher rate than is available in the open market?

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Replying to Hugo Fair:
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By nrw2
28th Nov 2021 18:07

It's unsecured, ergo a higher interest rate? 100% LTV?

Borrowing at 1.9% on the open market would definitely require a charge over the property and/or the company and would not run to 100% LTV.

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Replying to nrw2:
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By Hugo Fair
28th Nov 2021 18:33

Both valid points when in the open market (although I'd expect outright refusal rather than a near tripling of interest rate).
But when "The director has made an unsecured loan to his close company" those reasons go out the window (since it's hardly unsecured in the usual context of risk unless the director is extremely foolhardy with *his* own company).

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Replying to Hugo Fair:
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By Paul Crowley
28th Nov 2021 22:55

On enquiry, I would challenge if I worked for HMRC
Way over the odds.
But a minor issue conpared with the timeshifting being suggested ( just 7.5% dividend tax). The timeshifting could of couse cause the enquiry

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DougScott
By Dougscott
29th Nov 2021 08:58

Blimey amazing how you cant get a straight answer based on tax law out of a bunch of accountants. Interest rate has nothing to do with my query - make it 1% if you want. The question really is for the CT61 "when is the amount made available to the director"? I beleive in law this would be when payment is actually made or when it is credited to the directors current account. So how do you account for untransferred but still due interest. Some have suggested an "accrual" - isn't that the same as some sort of deferred interest account? And what is wrong with delaying actual distribution, is that not fairly similar to delaying payment of dividends for tax planning purposes?

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Replying to Dougscott:
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By Tax Dragon
29th Nov 2021 10:07

If you want an answer to a particular question, it helps if you ask the question you want answered.

What you're talking about now sounds like charging interest randomly (though would you take out a mortgage where the lender could charge you what they wanted when they wanted?) What you said in your OP was:

Dougscott wrote:

So for example initial capital loan is £250,000 and interest rate is 5% per annum. At end of year 1 the interest is charged of £12,500. If the director is paid the interest directly then the company must deduct income tax at 20% and report on a CT61 Return. As I understand it a repayment of capital would not suffer any income tax deduction.

(Emphasis added.) But if you are going to be rude, having had the question you asked answered, I'm out.

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Replying to Dougscott:
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By Leywood
29th Nov 2021 09:43

[quote=Dougscott] ‘’Blimey amazing how you cant get a straight answer based on tax law’’

Now you want advice on tax? Earlier you said ‘ want to know what the correct accounting is.’

If it is just the CT61 issue the is has been debated on here at great length at least twice, I seem to recall it reached a conclusion but my memory may be playing tricks and cba looking. Have a ferret around.

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Replying to Dougscott:
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By Paul Crowley
29th Nov 2021 10:35

Current account has zero meaning
This still comes over as if you want tax deduction in accounts but not to pay the income tax at the same time

NO it is not a clever tax avoidance (delay and avoidance are the same) scheme as clearly if it worked you could choose to claim 20 years worth of tax relief in the company, have the money, and per your thought process never pay the tax until company was would up

DIVIDENDS ARE NOT TAX DEDUCTABLE, not recognised until they are payable
Comparison completely fails

You have had numerous consistent straight answers
Cannot see any variation

You just do not want to hear the straight answers because you think you have discovered a way to get tax relief without paying the tax on the income receivable

The bunch of accountants disagree
So would your accountant, if you had one

"No one is trying to avoid any tax here, I want to know what the correct accounting is."
Are you sure about that statement
Why mention 2040 if that is not the date you or your estate wants to pay the tax?

Please read my first comment. and your reply to the comment
That said I am out and best of luck with your scheme
The scheme needs to be declared to HMRC
You are the sole person controlling the company
Good luck convincing HMRC that money received from company is not interest if interest has been charged and that the "accrual" is not at all times available to the sole director or director's related parties

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DougScott
By Dougscott
29th Nov 2021 22:28

I do remember a previous discussion about CT61s which I think is where I got the impression that a CT61 is not due until the director has the benefit of loan interest - either a payment or credit to their current account. As Tax Dragon suggests I will find that thread. Paul Crowley I believe you are wrong on your assertion that a mere accrual would create a requirement to issue CT61.

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