Directors Loan being used for Premium Bonds

[Casabian]

Does anyone know if a directors loan can be used for premium bonds?

Let's say a director borrows a modest £5k from the company account. That amount is transferred into their personal bank account - and from there, transferred into premium bonds. The sum is kept in PBs for 6 months (possibly earning some small windfalls), then the original sum is paid back, via personal bank account, into the company account, all within the same company financial year.

I suppose the first question is, would this be allowed? If so, would the PB winnings be classed as a benefit in kind and/or need to be declared anywhere?

 

[StevensOnln1]

The company is making a loan to the director, which will need to be repaid and may have tax and/or benefit in kind consequences depending on if/when it is repaid. What the director does with that money doesn't really matter, as long as it is repaid.

 

[DontAsk]

Does anyone know if a directors loan can be used for premium bonds?

Yes, and any other purpose the director want to use it for. Once he has the money it's his, in the same way as any other loan.

 

[Casabian]

Thanks both.

Yes, and any other purpose the director want to use it for. Once he has the money it's his, in the same way as any other loan.

Right ok. So similarly, if instead of premium bonds, the money earned interest in a personal savings account in those 6 months, that interest would still only be a matter for self-assessment, and not require declaring on the company return or be a benefit in kind? (Again, assuming it's paid back before the financial end of year.)

I know there are business savings accounts, I'm just trying to work out whether HMRC might consider 'taking money out of a company solely for the purpose of the director earning interest' a tax avoidance issue.

 

[neilsolaris]

Thanks both.



Right ok. So similarly, if instead of premium bonds, the money earned interest in a personal savings account in those 6 months, that interest would still only be a matter for self-assessment, and not require declaring on the company return or be a benefit in kind? (Again, assuming it's paid back before the financial end of year.)

I know there are business savings accounts, I'm just trying to work out whether HMRC might consider 'taking money out of a company solely for the purpose of the director earning interest' a tax avoidance issue.

My understand is, if your borrowing money from your company incurs an overdrawn DLA, then a benefit in kind exists.

I don't believe there is any tax avoidance involved. What tax would you be avoiding? Even if no tax was due on your personal interest, the interest might not have existed if it remained within the company, resulting in no tax liability.

 

[Casabian]

My understand is, if your borrowing money from your company incurs an overdrawn DLA, then a benefit in kind exists.

I don't believe there is any tax avoidance involved. What tax would you be avoiding? Even if no tax was due on your personal interest, the interest might not have existed if it remained within the company, resulting in no tax liability.

Thanks Neil. Yes it would be an overdrawn DLA, although paid back in 6 months, so I believe no BIK reporting or tax in this scenario, although I'll check to be sure.

Re. 'what tax would I be avoiding' - it was just the possibility that HMRC might consider the loan should be reclassified as taxable income due to its purpose being solely to generate interest/winnings. Obviously interest earned on a personal savings account would be taxable in the normal way, through self assessment. Premium Bonds don't have that of course, and that's what just gave me this vague sense that something like that could be exploited and therefore frowned upon (although I can't quite put my finger on why!)

 

[neilsolaris]

I just noticed you said it's for less than £10,000, so no BIK. You just need to repay it before the financial year end, which is a different tax than the BIK.

Whether you choose to leave the money in the company or borrow it, doesn't affect the corporation tax. You could earn interest on it in a business bank account if you wanted to, and there would be tax due on the interest. But that's completely your decision, you aren't obligated to do that. So I don't see any tax avoidance issues.

 

[BubbaWY]

Re. 'what tax would I be avoiding' - it was just the possibility that HMRC might consider the loan should be reclassified as taxable income due to its purpose being solely to generate interest/winnings. Obviously interest earned on a personal savings account would be taxable in the normal way, through self assessment.

I think when you have savings over £20k, the savings company has to advise HMRC who adjusts your tax code to ensure your savings are taxed. So self assessment wouldnt be required.

 

[UK Contractor Accountant]

I suppose the first question is, would this be allowed? If so, would the PB winnings be classed as a benefit in kind and/or need to be declared anywhere?

yes allowed.
BIK but no charge if <£10K
Disclosure in company accounts required - transactions with Directors (section 413 of Companies Act 2006)

 

[Elliot Green]

The main time there is a particular issue with this given the sums involved, is if the company is insolvent and the Creditor Duty is triggered when the money is given to the director personally (explained here

What Is The Creditor Duty? - Oliver Elliot

What Is The Creditor Duty? The greater the company’s financial difficulties, the more the directors should prioritise creditors interests.

www.oliverelliot.co.uk

) and a resultant breach of duty arises with the director unable to repay the funds.

Lots of directors have used company monies to invest in cryptocurrency for example that has plummeted in value and they have been unable to repay the funds personally. That is a potential problem. Particularly when the money has come from a Bounce Back Loan.