Can my UK Ltd give me a loan?

[rukleit]

Hi,
I'm planning to buy an apartment.

Can my UK Ltd. (which is profitable) give me a loan? I would pay interest (e.g. 3%) on the loan and pay it back over the next 10 years.

Would the UK Ltd. have to pay taxes on the amount it loans me?

 

[David Griffiths]

There are two consequences to taking a loan from your company.

If you pay interest at less than the official rate, currently 4%, there will be a benefit in kind on the shortall. So if you pay 3% then you are taxed on the 1%. This only applies if the loan exceeds £5,000 during the current tax year - that's going up to £10,000 from next April.

Secondly, and rather more significant, is that additional corporation tax will become due. If you make a loan and it remains due 9 months after the end of the year, then a charge of 25% of the value of the outstanding loan is due.

That charge gets repaid as the loan gets repaid, so you'd get it all back over the ten year repayment period. There are measures in place to stop you paying it back on the last day of the accounts year and taking it back out again straight afterwards

 

[rukleit]

There are two consequences to taking a loan from your company.

If you pay interest at less than the official rate, currently 4%, there will be a benefit in kind on the shortall. So if you pay 3% then you are taxed on the 1%. This only applies if the loan exceeds £5,000 during the current tax year - that's going up to £10,000 from next April.

Secondly, and rather more significant, is that additional corporation tax will become due. If you make a loan and it remains due 9 months after the end of the year, then a charge of 25% of the value of the outstanding loan is due.

That charge gets repaid as the loan gets repaid, so you'd get it all back over the ten year repayment period. There are measures in place to stop you paying it back on the last day of the accounts year and taking it back out again straight afterwards

Thanks David. Very much "on point".

So I make a loan (GBP 100,000) from my UK Ltd to me personally (so I can buy an apartment). I will set the interest rate at 4% (official rate), meaning that I will have to pay GBP 4000 interest in the first year back to the UK Ltd. I don't repay the loan and after 9 month the UK Ltd. has to pay GBP 25,000 to HMRC, which the company only would get back if I paid back the loan. Do I get it right?

Generally, do you think it is a tax-efficient thing to do?

My company is doing well (profitable) but personally I wouldn't have the funds to finance a home - so I'm looking for options.

 

[number42]

If your company has that sort of money does it not have an accountant to advise on tax matters?


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[David Griffiths]

Do I get it right?

Yes

Generally, do you think it is a tax-efficient thing to do?

Very unlikely. It will depend on your personal circumstances and if you are the sole shareholder or jointly with your better half.

The 25% that the company pays would be the same as your personal tax for a higher rate taxpayer with income up to £150k (Ignoring the blip at £100k) so you might not be saving anything. Although you will get the £25k back, the company will have to pay tax on more than £21,000 of interest that it receives over the life of the loan. And you'll have to fund the £12k a year repayments from taxed income anyway.

There's no substitute for working out the specific sums, but I'd not expect it to make sense tax wise

 

[rukleit]

Yes



Very unlikely. It will depend on your personal circumstances and if you are the sole shareholder or jointly with your better half.

The 25% that the company pays would be the same as your personal tax for a higher rate taxpayer with income up to £150k (Ignoring the blip at £100k) so you might not be saving anything. Although you will get the £25k back, the company will have to pay tax on more than £21,000 of interest that it receives over the life of the loan. And you'll have to fund the £12k a year repayments from taxed income anyway.

There's no substitute for working out the specific sums, but I'd not expect it to make sense tax wise

Thanks a lot, David. Great analysis and advice. Highly appreciated. Will discuss further with my accountant.

 

[Billmccallum]

without access to all relevant information, its difficult to advise properly.....but

one would assume that if a company was profitable and you took dividends, it would make more sense.