Tax implications for business loan.

[Calum_H]

Hi,

Could someone advise me how tax is calculated in the following circumstances:

If I take a loan from family to buy an existing business what are the tax implications for the business?

Would the loan be paid back before or after corporation tax has been applied?

Thanks
Calum

 

[faradaykeynes]

Any interest on loan is expense for business and will be deducted from profit before tax. Rest loan is liability for business and once capital amount is paid back it wont have impact on P&L

 

[Calum_H]

Thanks for that. Right just to get this into my head is the following example correct:

Business loan-
£100k at 5% pa over 1 year

Deductible before tax
Loan interest £5k

equals Earnings before tax

then pay Corporation Tax at 20%
equals Earnings after tax

then pay £100k loan back.

Also is this the best way to borrow money from family to buy a business for example could the money be gifted? Just looking for the most tax efficient way of doing this?

 

[faradaykeynes]

if it is 5% loan over 1 year then £5k is allowable expense for company to set off against company profits. Settling loan liability is nothing to do with corporation tax. In example above after a year you will pay £105k (including interest)

 

[Calum_H]

Ok I am clearly not grasping this!

Basically how does a business loan effect the amount of corporation tax i will have to pay?

Example the business I am looking at buying:

It makes £60k (adjusted net, before tax)

How is my loan treated and paid?

Thanks.

 

[faradaykeynes]

actual loan amount is liability for business, which means business has to pay it back, no tax on it as such, but if loan carries interest terms then what ever interest business is paying on loan is allowable expense. I will try explain in accountancy entries terms

When you get 100k loan
Dr - Bank 100k
Cr - Loan paybale 100k

end of year, presumed all paid at once

Dr - Interest Exp 5k
Dr - Loan payable 100k
Cr - Bank 105k

Hope that makes sense

you pay corporation tax on company profit not on loans

 

[Calum_H]

Think i've got it. Thanks!!

 

[venturespur]

I have been through the whole content of this which is very informative and knowledgeable stuff. Thanks