Directors Loan for house purchase

[jandug]

Hi there, I have a spent some time around the forum reading some topics on directors loans. I have a decent understanding of a directors loan account and the penalties if this isn't repaid within 9 months of year end. I am trying to avoid this scenario. I appreciate this topic transcends the boundaries of business / personal finance but I'd greatly appreciated any guidance, or any help by accountants who have came across similar stories in the past.

In the summer I took out £170k directors loan from my business to purchase our first home (a repossession with no kitchen). At the last minute this fell through and the money remained in my account as we were still looking at purchasing a property. Time went by and another house appeared which we pursued and were favoured by the seller because we could close the deal quickly with cash.

The problem I now face is that this loan needs to be repaid by march 2011 (9 months after business year end) or I will have to pay £42.5k to HMRC and go through all the issues with having this refunded once the £170k loan is finally cleared.

I am facing difficulties because the property will not have been owed for 6 months or more by march 2011 and the fact that this loan is being classed as a 'business loan', and lenders are being tetchy. I am surprised with the directors loan issue and I am not sure if something is being lost in translation and lenders think I am trying to clear a business start up loan of some sorts? My business has large cash reserves and I would be lending a low LTV ratio against the property.

Can anyone lend any guidance or help given this situation as to what my best plan of action will be?


thanks very much for any help!

Jan

 

[PHAWKS]

You could declare a dividend in March 2011 to clear the loan account?

You will however then have to pay tax on the dividend when you complete your tax return for the 2010/11 tax year. Not ideal as you will be taxed quite heavily.

I don't really see the mortgage problem, have you applied for a personal mortgage on the property? I'd speak to a mortgage broker as they should be able to sort it pretty easily.

 

[elaine@cheapaccounting]

Sorry I am missing something - are you not able to get a mortgage on the property to repay the DLA?

 

[MrPAYE]

Small beer in comparison but remember you will also have a taxable Benefit In Kind to declare on your P11D as you have had an interest free loan of > £5k.

 

[jandug]

Hi, thanks for taking the time to respond. Just to clear up, yes my initial conversations with the banks have been negative with regards to the re mortgage (equity release because it is unencumbered). I was wondering if this is something people have come across before and am I likely to struggle and thus wasting my time.

Taking the full £170k as a dividend is feasible but I'd like to avoid this given the amount of tax I will be subject too. I could in theory take a 2nd loan from the company to pay off the first but I am under the impression HMRC won't look too fondly upon this? However if I did do this I could repay the original loan and once 6 months have passed I will be able to speak to more possible lenders. (many dismiss me out of hand simply because the property has not yet been owned for more than 6 months.)

I wonder, Is it likely lenders are confusing a directors loan with say a business start up loan for example?

I'm simply now considering letting the loan run, paying the £42.k to HMRC and requesting it back once I clear the DLA.

Thanks MrPAYE that is noted for the tax return.

- Jan

 

[elaine@cheapaccounting]

Well you really have three options :

- declare div
- pay loan from private funds
- keep loan and pay CT

(plus obvious BIK)

However I assume you considered all of these prior to entering into the loan with the company.

Tax planning in arrears is never a good thing.

 

[jandug]

Just saying thanks for the replies, after a lot of leg work it appears I will be able to secure a mortgage via a broker. Very few lenders would touch it with regards to the circumstance.