Ltd Company interest on Directors loan?

by Readers Question

2 months ago

Ltd Company interest on Directors loan?

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Ltd Company interest on Directors loan?

Just wondering if anyone has any ideas on this as I am not finding much on the web and there seems to be different ideas about CT61 forms.

I am about to ( July 18 ) clear the mortgage across my 6 flats which I have had in a ltd company since 2005. I have thrown every penny of savings at this each year and come July will be sitting on £600k property with no debt and £3000 per month income. The directors loan will be £375k

Do I start charging interest to my ltd company and take the money as interest…at say 5%. If so does the company pay 20% to HMRC and then me again on my tax return? If so that does not sound economical.

Or do I let it run as in the past and not take any interest but start taking dividends. After general running costs I should be left with around £25k to pay tax on.

I am planning to stop working as I also have an income of around £12k from other flats which are not in the ltd company as back in 2005 they would have had too much Corporation Tax to pay.

Any thoughts are welcome – plus I am in Scotland as that now makes a tax difference unfortunately.

Peter



Comments

Neil Patterson

2 months ago

Hi Peter,

First if you withdraw the money you take it as a repayment of the directors loan and not as a Dividend payment or you could pay dividend tax unnecessarily.

From HMRC >> https://www.gov.uk/directors-loans/you-lend-your-company-money

" If you lend your company money

Your company doesn’t pay Corporation Tax on money you lend it.
If you charge interest

Interest you charge your company on a loan counts as both:

a business expense for your company
personal income for you

You must report the income on your personal Self Assessment tax return.

Your company must:

pay you the interest less Income Tax at the basic rate of 20%
report and pay the Income Tax every quarter using form CT61"

Paul Mullally

2 months ago

Hi Peter,
I am in a similar situation but in England, so the tax treatment may be different.

When you charge the interest to the Ltd company, you must complete the CT61 form as you state and pay the 20% tax within the quarter. You must also report the additional income on your self assessment form and pay any additional tax due if you are in a higher tax bracket.

The amount you charge the company must be considered "reasonable" but as HMRC don't publish a rate, it is up to you. I suggested 6 or 7% to my accountant and they said that would be fine.
If you charge the interest, you are paying the tax on the income but are reducing the profitability of the company and reducing your Corp. Tax in return. It really is a case of crunching the numbers.

If I were you, I'd make full use of the tax bracket you're in. You'll get £2k dividend tax free, then the rest at 7.5% depending on your overall income.

Good luck....Paul.

Roger P

2 months ago

buy the Tax Cafe book on using a Property company to save Tax all their publications are good advice

Desi Dragieva

2 months ago

Not answering the question above by Peter, but still relevant. We took equity out from our residential property in order to invest in a purchase on our Ltd. We were advised we can charge the company the interest we pay on the additional loan without reporting it as profit.. Or is this completely wrong?

Paul Mullally

2 months ago

Sorry to tell you Desi, but that's wrong. If you're charging interest to your limited company, you are earning additional income personally (regardless of what interest rate you charge) and this must be reported on both the CT61 form quarterly and recorded on your annual self assessment.

Tim Rogers

2 months ago

I believe there is another possibility. The company owes you personally a debt of some £375k. This can be repaid over time without attracting personal tax. Once you have made the company deductions and paid corporation tax the remainder can come to you tax free.

With an income of some £30k you'd be looking at 22-25k pa.
Your personal tax allowance would be taken up by the 12k from the other properties.

If you outlive the debt repayment period, some 15-20 years, you can take a revenue stream as allowed by the tax rules at that time. Only you can decide if the benefits outweigh the 'loss' of interest, but as it is all the same money pot.......

Paul Mullally

2 months ago

Reply to the comment left by Tim Rogers at 18/04/2018 - 09:49
Tim,
I'm not sure what you getting at, but if you've given/loaned money to the company but not charged any interest, then you can pay it back whenever you want and at whatever rate you want or have I missed something a little more subtle? I'm always open to new ideas 🙂

Desi Dragieva

2 months ago

Reply to the comment left by Paul Mullally at 17/04/2018 - 21:26
Thank you Paul, appreciated. We were advised by the accountant that the interest we are paying on the additional loan we borrowed to invest can be charged from the Ltd when the loan is paid back to us, which doesn't sound like is the right way forward... will challenge this, thank you

Peter Gulline

2 months ago

Thanks everyone ,
I dont want to take the £375k out until I sell all the flats as I see that as a way to get a chunk of cash in 10 years time. Of which £375k will be tax free.

My main concern is that if i charge 6% which equals £22500 which after 20% CT61 deduction will leave me with £18k . I want to know that i will not be hit for "another" 20% when i do my tax return as long as i stay under £40k earnings.

To pay corporation tax at 20% ( 19%) then pay 7.5% dividend is really paying 27.5% . However the dividend needs to paid to the other shareholder ( wife) who is on the higher tax bracket. so she would be paying 32.5% on top of the 20% CT was deducted which would make a massive tax bill.

Hopefully this clears up my question.

Rgds

peter

Paul Mullally

2 months ago

Peter,
With different class of shares, you can vote different dividend amounts or not at all to one specific share class. If you have children over 18, you could also look to create "growth shares" to move wealth "down the chain" from an IHT perspective. This is the beauty of having a company in that you control when and how you take the money.

Your calculation is generally correct although the higher tax earnings bracket is £46,350 and CT is 19% (possibly 18% by 2020). Avoid going over the £100k bracket at all costs, or blow through it by so much, you won't care!

As I said earlier you really need to crunch the numbers. Create yourself a decent spreadsheet to estimate/record both of your annual income streams and make the best of your tax brackets in every year. You'll then be able to play with the figures to assess the impact of each option.

The better you get at knowing your own circumstances and taxation, the better off you'll be. You could pay an accountant to do the same, but there's no real incentive for them!

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