OH and I have, for many years, owned and run a small manufacturing business that is a limited company.  We most of our savings last year to purchase the plot on which we will demolish an old bungalow and then build our new house.  We want to continue living in our current house during the build, but we need the value of the house available to us in order to fund the build.  We looked at the options available to us to cover the (hopefully!) short term funding need and these included a mortgage (which we could secure against our current home), bridging finance or taking a loan from our company.

 

We opted for the final one, and this is the outline of how this works and why we went for it.

 

We primarily pay ourselves via dividends from the company (no NI and until recently, more tax efficient than a salary).  When we draw a dividend from the company profits, that money has been taxed twice before it is in our hands - 20% corporation tax followed by whatever level of personal tax.  For the sake of this example, let's say the blend of basic and higher rate tax comes to approximately 30%.  So, on a company pre-tax profit of £100k, that would amount to £56k in our hands, after tax. 

 

Alternatively, the company could make a short term loan to us on at a commercial rate of interest.  So, of that £100k pre-tax profit, £80k would be available to us.  There would still be corporation tax at 20% but no personal tax as we are taking a loan rather than drawing a dividend.  There are virtually no set-up fees and although the company has to charge interest on the loan, some portion of this would come back to us as we do eventually draw dividends. 

 

The trickiest part of this is timing because the repayment point is quite stricly laid out.  The loan has to be repayed within 5 months of the end of the financial year in which the loan is made.  For example, if our financial year end was 28th February and we took the loan today, we would have to repay it by the end of July 2018.  If however, we took the loan on the 1st March, we would not have to repay it until 31st July 2019.  Timing is everything!  If we do not repay the loan by the due date, there are some fairly hefty tax consequences, primarily as a taxable benefit in kind.

 

I'm not a tax expert and so can't answer detailed questions on the tax legislation of this method.  I was aware of the possibility of doing this and talked it through with our accountant who confirmed that it could be done and the details of it, but it is a method that should work okay for us and could be useful to others.

 

 

Edited January 8, 20188 yr by vivienz
error in example

Thank you that is very useful info and far clearer than our accountants wishy washy stuff.

I would suggest smaller loans spread over a period of time. Eg eight £10k loans.

The reason being that you are more likely to be able to borrow  £10k short term to repay the loan. Once a loan is repaid it is available to the company to be loaned out again or dispersed as dividends etc.

Also staggering the loans means you are paying less interest, rather than having  £80k in your personal back doing nothing 

Not sure how focused this thread will remain, but today you can also borrow within a financial year from your cash ISA - if it is the type that allows it.

 

You need to pay the cash back by the end of the year or you lose your ISA benefits for that slug of cash.

 

https://www.moneysavingexpert.com/savings/flexible-ISAs

1 hour ago, bassanclan said:

I would suggest smaller loans spread over a period of time. Eg eight £10k loans.

The reason being that you are more likely to be able to borrow  £10k short term to repay the loan. Once a loan is repaid it is available to the company to be loaned out again or dispersed as dividends etc.

Also staggering the loans means you are paying less interest, rather than having  £80k in your personal back doing nothing 

 

Good to have more information on the different ways this can be used.  The figures in the example are just that and aren't how we are planning to use this facility, they were really so that I could give a clear but basic example of it.

2 hours ago, Ferdinand said:

Not sure how focused this thread will remain, but today you can also borrow within a financial year from your cash ISA - if it is the type that allows it.

I believe this is not limited to cash ISAs only, you can also do this with any shares or other investments within the ISA wrapper.

Tax wise on your company loan - if not repaid by the date (5 months from the year end - although I thought it was 9 months), then you are charged income tax as if it were income, but you do get this back when you do eventually repay it.

As @trw144  mentions nine months from year end. Assuming you are a director, if at the end of this period the loan is not paid back then this is not a benefit in kind, but actually a temporary tax charge at 32.5% of the overdue balance usually paid in the same manner as corporation tax. Therefore if a company made a taxable profit of £100,000 and you had £80,000 still overdrawn as a loan, then the total amount due to the HMRC would be £20,000 corp tax (let say 20% corp tax) and £26,000 as a temporary tax charge.

 

 

 

 

Thanks for the clarification, everyone. The hive mind wins again!

9 months is considerably more breathing space than 5, that's for sure. I will be doing my best to avoid any additional tax charge, whether temporary or not.