Using savings for new venture

[Tonyubr]

Hi all
I'm about to start an additional small business using My Own savings and wondered if it's a straight forward process to pay myself back as I would repay say a bank loan?
Many thanks. T

 

[Scalloway]

Yes if you put your own money into a business as a loan you can withdraw it at a later date as you wish.

 

[Tonyubr]

Thank you

 

[AppCo]

As mentioned it is really simple to do - If it's a Ltd company just transfer the money in and put it against the director's loan account.

When the business has the money you can pay it back to yourself in bits or all in one go.

Might seem obvious (but some people ask about it here sometimes) but when you pay yourself back that is not classed as an expense, whatever you spend that money on probably will be expenses (I've seen people ask here if they can also count paying themselves back as a deductible expense)

 

[Tonyubr]

Thank you for that. So to clarify would the new business class paying me back as an expense ie a deductible?

 

[AppCo]

Thank you for that. So to clarify would the new business class paying me back as an expense ie a deductible?

What the business pays you back is not deductible.

If you put £1,000 in and buy £1,000 worth of equipment to get started then the £1,000 could be deductible.

You can't then also claim the £1,000 you repay yourself later as an additional deductible.

EDIT: I am talking in the context of a Ltd company, I don't know how it works when your just trading as a sole trader, I think it's similar though just maybe accounted for differently

 

[Scalloway]

Thank you for that. So to clarify would the new business class paying me back as an expense ie a deductible?

No. The repayment of any kind of loan capital is not tax deductible.

 

[STDFR33]

Thank you for that. So to clarify would the new business class paying me back as an expense ie a deductible?

No. Just like how it isn't income to the business when you introduce the funds.

 

[Tonyubr]

Ok so it's not tax deductible percee but I simply treat it as if I'd borrowed from a bank though Yes? And when I pay the money back into my savings account, That is a cost to the new business?

 

[STDFR33]

Ok so it's not tax deductible percee but I simply treat it as if I'd borrowed from a bank though Yes? And when I pay the money back into my savings account, That is a cost to the new business?

No!

It isn't income and it isn't an expense.

The only thing that would be an expense is any interest you charged to the business, but you don't say what type of entity this business will be.

 

[Tonyubr]

That is frustrating and I'm not sure if it makes sense.
If I borrowed 20k from a bank I would repay say £500 a month back to the bank. That is a deductible or costing or expense to the business? The same as if I use my own money to start a business I'm borrowing from my savings and that money needs to be repaid

 

[STDFR33]

If I borrowed 20k from a bank I would repay say £500 a month back to the bank. That is a deductible or costing or expense to the business?

No it isn't. But the interest the bank charges would be.

The money you inject is presumably to purchase things that the business needs. If you obtained tax relief on the loan and on the expenses, you'd be getting double the tax relief which would clearly be wrong.

 

[Tonyubr]

Well I really appreciate your replies thank you.

Is there a limit on what interest I can charge myself on my own savings to fund a new business?

 

[STDFR33]

Well I really appreciate your replies thank you.

Is there a limit on what interest I can charge myself on my own savings to fund a new business?

What is your new business? Sole trader, limited company etc?

 

[Tonyubr]

Yes sole trader

 

[STDFR33]

Then you can't charge interest.

Even if you could, it would be a pointless exercise.

 

[Tonyubr]

Well one sole trader the other will be a managed retail business (small)

 

[Tonyubr]

How do i repay my savings that I'm using

 

[STDFR33]

How do i repay my savings that I'm using

As a sole trader, you and the business are the same. You'd pay yourself when funds permit.

 

[Tonyubr]

Ok well that comes as a bit of a shock. I thought I'd be able to benefit from using my own savings to fund the new ventures apart from the obvious of not having the banks breathing down my neck. Well thank you once again. How about if I borrowed the money from a family member instead. Yes I might have to do that to benefit from an expenses pov?

 

[STDFR33]

Ok well that comes as a bit of a shock. I thought I'd be able to benefit from using my own savings to fund the new ventures apart from the obvious of not having the banks breathing down my neck. Well thank you once again. How about if I borrowed the money from a family member instead. Yes I might have to do that to benefit from an expenses pov?

The capital aspect of the loan would not be deductible. If the family member charges interest, you can claim the interest. But the cost of the interest would outweigh the tax relief.

 

[Mr D]

You benefit using your own savings by not having to pay the bank. No loan payment, no interest charges, no bank demanding repayment in full.

 

[Tonyubr]

Ok so I'm understanding this now. The capital aspect of the loan is not deductible which is exactly where the confusion arose from. Thank you for clarification it's much appreciated. Kind regards

 

[Tonyubr]

Obviously this changes my opinion slightly in that I presumed that all capital introduced was tax deductible

 

[Tonyubr]

My business is going to start x amount in the red though because of the loan. When I start taking money, surely I won't need to pay any tax until I am back in the black is how I see it

 

[STDFR33]

My business is going to start x amount in the red though because of the loan. When I start taking money, surely I won't need to pay any tax until I am back in the black is how I see it

You pay tax on profits. The loan injection and repayments do not impact profits, only any interest on the loan.

 

[Mr D]

Obviously this changes my opinion slightly in that I presumed that all capital introduced was tax deductible

No. But you can take the loan back out without the capital being treated as income.

Just as you can with a savings account.

 

[duggimon]

My business is going to start x amount in the red though because of the loan. When I start taking money, surely I won't need to pay any tax until I am back in the black is how I see it

Tony, I don't quite know how you are not getting this. Your balance sheet position is irrelevant for tax purposes. You pay tax on all your income less all your expenses.

The money your business borrows, whether it comes from you, your mate Dave, the bank or Stephanie the business loan llama, is not income. When you pay that loan back it is not an expense. If you borrow a million pounds from Stephanie and use it to make sales of £800 and you pay costs of £200 and give the rest back to her, you pay tax on your £600 profit even though you still owe her £999,400.

Your opinion on how the tax system ought to work is neither correct nor relevant, and if it was correct then everyone could stop paying tax tomorrow by borrowing more and more money then paying it back.

 

[Sorodo]

Good luck with the venture. It's good to see someone who's willing to back themselves financially with their own savings to get going. There are some gov startup initiatives to help out too