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Profits taken as loan interest

Is HMRC happy with company profits taken as loan interest rather than dividends and salary ?

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I have a mixed use commercial property that produces rental income.  To further protect myself from any liability, I want to put the property into a Ltd company structure.    If I do that then from next year I will pay 17% Corp Tax and 7.5% dividend tax (Total 24.5%).   Currently I am only paying 20% income tax on the rental income.   If I loan the company the money to purchase the property from myself and then charge annual interest equal to the rental income, then the company will deduct 20% tax directly and forward to HMRC.   The end result is HMRC receive the same tax as before.   But is HMRC happy with this type of arrangement ?

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By NH
20th Oct 2019 13:58

What rate of interest are you paying yourself?

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By paul.benny
20th Oct 2019 15:52

What does your accountant advise?

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By frankfx
20th Oct 2019 15:59

When it comes to profit extraction 17% plus 7 .5% does not equal 24.5%

Closer to 23.23%.

7.5% may just be a fleeting rate.

10% may be on the Chancellor's target list.

The 7.5% was introduced when CT was 20 %

In the light of the above you may want to seek professional advice.

The above tax rates are the least of your concerns.

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By aka_bilk
20th Oct 2019 16:01

To equal the current rental income, I would only need to charge 9%

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Replying to aka_bilk:
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By Matrix
20th Oct 2019 16:12

How much would a third party charge? HMRC could challenge the interest deduction on the grounds that the interest is not in arm’s length terms.

What about capital gains tax and stamp duty?

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Replying to aka_bilk:
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By Accountant A
21st Oct 2019 01:19

aka_bilk wrote:

To equal the current rental income, I would only need to charge 9%

And if the rental income goes up and down, you can change the rate of interest to make sure the two are always equal.

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By aka_bilk
20th Oct 2019 16:59

I would imagine the bank would want at least the same rate of interest. Capital Gains is not an issue in this case and as mixed use property the Stamp Duty would be small.

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By Tax Dragon
21st Oct 2019 06:53

aka_bilk wrote:

But is HMRC happy with this type of arrangement?

That's a strange question. HMRC won't mind what you do, so long as you pay the appropriate tax (and comply with other matters under its governance). IANAL, but I doubt your proposal is unlawful, if that's what you meant.

I am a tax advisor. Your proposed set up gives rise to tax issues which you don't currently have. (I mean in the longer term - AA has hinted at one of them - not the obvious CGT and SDLT points which are easy to deal with. It's obviously more complicated really - you've turned one asset into three assets and one liability, one receipt into two receipts and an outgoing.)

It would be worthwhile talking it all (and I mean all) through with a professional. You're getting only bits and pieces from this thread.

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By Tax Dragon
21st Oct 2019 07:06

aka_bilk wrote:

To further protect myself from any liability....

Insurance?

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By aka_bilk
21st Oct 2019 09:18

I have insurance, but they can always try and get out of a liability claim. I always remember the words of my first accountant who said to me "The best form of insurance is a limited company".

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Replying to aka_bilk:
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By Tax Dragon
21st Oct 2019 09:46

Genuine questions, as it sounds as if you trusted the advice of your first accountant but not the advice of your current one (and you seem like your head is screwed on): do you wonder about that change of relationship, do you have any insight into what has caused it and do you have any ideas as to how trust [in the professions] can be restored?

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Replying to Tax Dragon:
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By aka_bilk
21st Oct 2019 10:11

Tax Dragon wrote:

do you have any ideas as to how trust [in the professions] can be restored?

For me, it never can be. My first accountant (45 years ago) was so bad, I had to go down to the local tax office and sort out my affairs with them (lovely helpful people by the way). Another accountant (from a large practice) failed to use my tax allowances one year. When my affairs grow in size and became a little complicated, my new accountants (multi branch practice) admitted on some areas of specialist taxation, I knew more than them.

But irrespective of the above, it is a good idea to find out as much as one can about any matter requiring professional advice, before you actually sit down with the professional. Then you have half a chance of discovering if they actually know what their talking about. Hence I ask this question here, before I go talk to the professional.

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Replying to aka_bilk:
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By Tax Dragon
21st Oct 2019 10:52

aka_bilk wrote:

It is a good idea to find out as much as one can about any matter requiring professional advice...

I would be happy to comment further on your question if you cared to share what you have found out so far. IMO it is not reasonable to expect me (or others in here) to comment on the issues if you won't do so yourself.

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Replying to Tax Dragon:
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By NH
21st Oct 2019 12:24

Tax Dragon wrote:

do you have any ideas as to how trust [in the professions] can be restored?

There are many answers to that question it is difficult to know where to begin, but to start with I have been in practice over 20 years and every year I will get new clients that have been with bigger firms and I am constantly appalled at how much some businesses pay year after year for terrible service and bad advice, usually the client has stayed with them out of some misguided loyalty, because they think its too much hassle to move or because they just think all accountants are like that

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Replying to NH:
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By Tax Dragon
21st Oct 2019 12:37

I see your point.

Thank you.

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Hallerud at Easter
By DJKL
21st Oct 2019 11:10

Methinks you doth protest too much re needing a company to cover you in case the insurance has a gap. We have something like £8 million of commercial property with rents close to £600k p.a, in a bare partnership and have done (albeit not always at these figures ) for over forty years without any such issues;all you need is a decent broker to avoid gaps in cover.

And frankly if negligent re management of property, and trying to use a company to ring fence, it is unlikely these days it would in such a scenario protect the directors anyway;,using a company is not a magic shield protecting directors from liability if they have grossly failed in their duties.

To me your cure does not warrant the downside costs, for instance we are now very grateful to have some of the portfolio in a partnership rather than in one of our corporate beasts as when IHT eventually falls due, as it will, access to cash to pay the liability ought to be somewhat simpler than having all the assets within a corporate wrapper.

Think long and hard re what wrapper/structure works best looking at multiple factors would be my advice, companies certainly have their use re ring fencing development risk but less convinced when you are looking at what appears to be passive investment with limited/low bank involvement.

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