Share this content

Starting rate for savings & directors loans

Does the interest from a director loan to a company benefit from starting rate for savings allowance

Didn't find your answer?

Hi, I'm trying to find out, if my wife loans capital into my company (buy-to-let) and it pays her interest on that capital, can she use the £5K allowance within the "starting rate for interest" as well as her £1K personal allowance, so that she pays less tax?  I'm aware that this extra allowance can only be used on a sliding scale from £5K down to £o between £12,500 income and £17,500 income.  I just can not find anywhere, if the allownace can be used with this sort of interest payment?

Hope someone can help

 

Mike

Replies (13)

Please login or register to join the discussion.

avatar
By richard thomas
12th Apr 2021 18:39

It can. All interest is savings income - see s 18(3)(a) ITA 2007. Where have you looked? It's always a good idea to start with the legislation if you want to answer a tax question.

Thanks (0)
Replying to richard thomas:
avatar
By Tax Dragon
12th Apr 2021 20:31

I don't think that's the question. I think the OP is asking about how the provisions work together - Ss12, 12A, 16 etc.

Of course, the payments by the company have to reflect current market conditions, else they won't count as interest in the first place.

Thanks (0)
Replying to Tax Dragon:
avatar
By Paul Crowley
12th Apr 2021 21:01

So mortgage rate, or personal loan rate or shark rate or credit card rate?
All market rates
The loan is probably unsecured so probably err on the high side.

Thanks (0)
Replying to Paul Crowley:
avatar
By Tax Dragon
12th Apr 2021 22:01

Or don't err (there are accepted rates for such things).

Thanks (0)
Replying to Tax Dragon:
avatar
By richard thomas
12th Apr 2021 21:19

Well the OP asked "I just can not find anywhere, if the allownace can be used with this sort of interest payment?". I took "this sort" as meaning as distinct from any other sort or type of interest payment, such as from a bank deposit.

Thanks (0)
Replying to richard thomas:
avatar
By Tax Dragon
12th Apr 2021 22:08

Whilst I've gotten used to threads where respondents argue over what a silent OP actually meant, I aim not to get drawn in anymore. FWIW, I took 'I just can not find anywhere, if the allownace can be used with this sort of interest payment' to be a statement with a stray question mark, and 'I'm trying to find out, if my wife loans capital into my company (buy-to-let) and it pays her interest on that capital, can she use the £5K allowance within the "starting rate for interest" as well as her £1K personal allowance, so that she pays less tax?' - whilst also formulated as a statement with a stray question mark - as indicative of the intended query.

We may never know.

Thanks (0)
Replying to richard thomas:
avatar
By Paul Crowley
13th Apr 2021 00:23

I think we all agree that allowance is appropriate to that interest
We have now veered into rates of interest that are acceptable
I will however assume we are referring to annual interest not short term before the thread strays to far
But we do not know if wife is a shareholder
Post would appear to suggest not, My not our company. But she is a token director.
If I lent unsecured as a non shareholder my commercial rate, given that I expect to wait YEARS for repayment might be a bit higher than than HMRC's rate for late paid tax, but probably a bit lower than bank current account overdraft interest on an unsecured lending ( if such a thing really exists)

Thanks (0)
Replying to Paul Crowley:
avatar
By Tax Dragon
13th Apr 2021 09:31

I made a non-specific observation* that (I thought) was so uncontroversial that I see I even started it with "of course". It's you that's appears to want to advise the OP, based in part (as ever) on supposition and guesswork.

*Making a non-specific observation is not the same as generalising. Honest. :-)

Thanks (0)
Replying to Tax Dragon:
avatar
By richard thomas
16th Apr 2021 18:42

I know there are contributors to this forum who have objected to my asking another contributor was the legal justification for a statement was, but here goes again, but as the question is directed to Tax Dragon I assume umbrage will not be taken.

Why does the commerciality of the rate of interest mean that the payment will not count as interest at all? If the rate is below a reasonable commercial rate that surely has no effect except to reduce the amount which qualifies for the allowance. If the rate is above a reasonable commercial rate, then Case E of s 1000 CTA 2009 can apply to treat the payment as a distribution (and so outside Chapter 2 Part 4 ITTOIA), but only to the extent of the excess. The amount equal to a reasonable commercial rate remains interest.

The company cannot of course deduct the excess, but the excess is capable of falling within the dividend nil rate.

This assumes the wife is a shareholder.

I may have overlooked some other provision you had in mind.

Thanks (0)
Replying to richard thomas:
avatar
By Tax Dragon
20th Apr 2021 12:37

Apologies Richard, I had forgotten about your question until my most recent post, which was also about interest rates, prompted remembrance.

However, rereading it, I think your question was in large part rhetorical. I presume this as you seem to have answered it, in large part, yourself. I agree with your answer (although I am not so sure it does assume the wife is a shareholder). And I take the point that my earlier language may have been (ok, was) imprecise - though "at all" was your addition to my imprecision.

A hypothetical scenario posed back hopefully makes the point more clearly. Suppose spouse 1 is sole director and 100% shareholder of a company. Spouse 2 has no involvement, but lends £10 to the company. I provide no more information about the loan (I don't want to cause Aweb to crash by providing information!), except that a 100000% pa interest rate applies.

If I've counted my 0s correctly, spouse 2 is paid £10,000 pa.

Maybe in law the payments are of 'interest'. IANAL. Tax-wise, I'd suggest there are several taxing provisions in play - though my guess (without checking) is that s1000 CTA 2010 (if it applies) will 'win', as frequently dividend treatment applies in priority to other charges - especially employment charges, which may also be in point here. By itself, s1000 (if it applies) is enough to tax at least £9,999 of the £10,000 as something other than interest.

It's quite likely the tax charge (in this non-market-rate scenario) is on spouse 1, under Pt5 Ch5 of ITTOIA. This would preclude use of wife's allowances, in the OP. I don't think there's an "excess amount" distinction here - it's all so taxable, the interest element and the deemed distribution. And the payment (in this scenario) is quite likely not deductible for the company.

Forgive me for wandering away from your question somewhat, Richard. In conclusion, I strongly disagree with Paul's suggestion to err on the bullish side.

Thanks (0)
avatar
By Paul Crowley
12th Apr 2021 19:11

Interest is interest
But tax needs to be deducted by the company when interest paid and tax paid over to HMRC.
Taxpayer can then recover tax refund from HMRC on tax return or refund claim.
To keep admin to a minimum, just pay once a year.
If paid monthly then could be 5 returns a year, all with deadlines

Thanks (2)
avatar
By Mike Rickard
13th Apr 2021 12:16

Good afternoon,

First of all thank you to all of you for replying to my question. I am really sorry if I was not clear with my choice of words, but this is all very new to me and I am trying my hardest to get my head around it, but thank you all anyway.

It sounds like the interest payments can be used with the allowance as long as they are at a suitable market lending rate, which they will be, so that is great news.
My wife and I are about to set the company up and buy our first HMO property as joint directors and shareholders, we are just trying to understand the best way to do this with the balance of debt and equity that works for us and our personal tax allowances.

The good news is that you have all been so helpful, the bad news is, there may be more questions coming your way!

Thanks (0)
avatar
By More unearned luck
16th Apr 2021 15:37

Not relevant to the questions asked or thought to have been asked: CT61.

Thanks (0)
Share this content