Tax Free Interest On Your Directors Loan

Tax Free Interest On Your Directors Loan

17:39 PM, 26th February 2021, About 3 years ago

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When lending to your company, you can now charge interest on Directors Loans, offset the interest as a company expense and pay no tax on receipt of the interest.

Your accountants might tell you this cannot be done, but that’s probably because they don’t know how it is done.

The solution involves the use of an Innovative Finance ISA.

We have completed due diligence and have seen:

  1. HMRC clearance letter
  2. Testimonial from a ‘big four’ accountancy professional
  3. QC’s legal opinion

Looking to purchase another property?

You don’t need to drain your ISAs to fund it!

You may be familiar with Property118’s ‘Smart’ property company structuring, where multiple classes of shares are used in a family business.

Director’s Loan Account ISA’s work in a similar way; as a company director, you can use a Director’s Loan to lend cash to your business, which is ISA-wrapped. Friends and family members can also contribute funds to the company and earn tax-free interest on their investment.  Having a formalised loan agreement protects them should anything happen to you or the business, because without a formalised loan there is no legal basis to recover the loan.

Setting up the ISA takes less than 20 minutes.

Please note …

  • The interest rate should be commercially considered, the average interest rate is 18%
  • Your business must have a genuine need to use the funds. i.e. the ISA should not be used solely for the avoidance of tax.

DO NOT buy another investment property until you read this!

As you may be aware, if you buy rental property in your own name you now suffer the following:

  • Income tax on profits at your marginal rate
  • Up to 28% capital gains tax when you sell, payable within 30 days
  • 40% inheritance tax
  • The inability to offset finance costs against rental income from residential property

However, with a ‘Smart Property Company structure’ you could:

  1. Offset all finance costs as an expense against rental income
  2. Attribute some or all future growth in the value your property investments for the benefit of future generations, thus avoiding inheritance tax at 40%
  3. Pay just 19% corporation tax on profits
  4. Extract your investment capital from your property portfolio without having to pay personal income tax

Do not settle for an ORDINARY property company share structure

If your strategy is to acquire further investment properties within a Limited Company structure, please do not settle for an “ordinary shares” structure.

The existence of a single class of ordinary A shares is often a clear sign of there having been no thought given to tax planning whatsoever. If you or your accountant purchased your company ‘off-the-shelf’ and then did nothing to modify the share structure or the rules of the company (Memorandum and Articles of Association) then you are probably missing one or more very lucrative tax planning opportunities.

Surveys of buy-to-let mortgage brokers and lenders over the last few years have revealed that up to 85% of all new buy-to-let mortgages applications are from Limited Companies.  The Property118 tax team has reported that more than 99% of these companies have made no modifications to their ordinary A share structures whatsoever.

Ordinarily, shareholders in a company own just one type of shares, called ‘ordinary’ shares. These have:

  • Voting rights
  • Dividend rights
  • All capital appreciation attributed

However, it is possible to create multiple classes of shares so that differing levels of dividends can be declared to each class of shares. From a tax planning perspective, this can be useful for a family business where the shareholders have different levels of income from other sources. Likewise, it is possible to create a class of shares that initially have a nominal initial value, because they have no voting rights, no capital value and no automatic rights to receive dividends. This class of shares is ideal for inheritance tax planning because future growth in the value of the business can be attributed to them, and they can be gifted without tax implications whilst their value is negligible.

The Property118 tax team have put a label on this form of tax planning – “SMART Property Company structuring”.

The good news is that it is never too late, even if you already have an ‘ordinary’ single class of shares structure. It can be modified.

Likewise, if you have been considering the formation of a property company for your future investment acquisitions, please don’t settle for an ordinary ‘off-the-shelf’ property company. A cheap set up could end up costing you dearly in the longer term. Get your foundations right before you start building!

Tell us about your future property investment aspirations by completing our enquiry form and we will be happy to provide you more information about what is possible and even arrange a ‘one-to-one’ recorded video consultation with one of our landlord tax planning consultants and recommended Barristers-At-Law.

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