New announcement. Learn more

CHARTERED ACCOUNTANTS (ICAEW)

News and advice to help make your property business a success

Landlords TaxProperty TaxLandlords Tax ReturnsLandlords AccountsProperty Tax ReturnProperty AccountsTax ReturnsLandlords FinancialChartered AccountantsOnline AccountantOnline BookkeepingOnline Tax ReturnsYour Online AccountantYour Online BookkeeperTaxBusinessadviceAccountingCashflowProperty AccountantSmallbusinessVATBusinesstipsExpensesInheritance TaxPropertyTaxplanningCapital Gains TaxCgtFurnished Holiday LettingsLandlords AccountantPAYEProperty bookkeeperSDLTTaxreturnAllowable Business ExpensesAnnual Exempt AmountBusiness ExpensesBusiness RateCapital AllowancesCapital GainsCapital gains tax propertyComplianceDeductibleexpensesDisincorporationDividendsEmployment AllowanceFinanceFinancialmanagementGiftsHMRCHoliday Lets TaxIhtexemptionsIncome TaxInvestment Property TaxMaking Tax DigitalMakingTaxDigitalMileage AllowanceMobilephonesNICOverlapreliefPensionPprProperty Company TaxProperty Tax Deductible ExpensesPropertyallowanceReimbursedexpensesRent a Room ReliefSmall BusinessTimetoPayVAT invoice60 day capital gains limitAbolitionclass2AccrualsbasisAcquisitionsAdvisoryfuelratesAIAirBnBAlphabet sharesAmapAnnual Tax on Enveloped DwellingsAppealArtificial intelligenceAssessmentAsset disposalAssociated CompanyAssociated Company Tax RulesAutumnstatementBad DebtBad Debt Tax ReliefBaddebtsBadgesoftradeBeancounterBenefits in KindBreakeven PointBudgetBusiness adviceBusiness asset defermentBusiness coachBusiness ContinuityBusiness EntertainmentBusiness RatesBusiness Rates ReliefBusiness tipsBusinessgrowthBusinesstypesBuy or Lease EquipmentBuytoletCapital Allowances for CarsCapital GainCapitalallowancesCapitalexpenditureCar Capital AllowancesCarry Back LossesCashbasisChange of Tax BasisChatGPTChild BenefitCIS SchemeCommon TenantCompanies ExpenditureCompanies HouseCompany Account DeadlinesCompany Account FilingCompany Strike OffCompany Tax Efficient PropertyCompanyassociationCompanyloanstaxfreeCompulsory Strike OffConstruction Industry SchemeContacthmrcContentmarketingContributionsCorporation Tax LossesCorporation Tax New RegimeCorporation Tax RatesCorporationTaxCostsCryptocurrencyCustomerlistimplicationsDeductible Business ExpensesDeductionsDemergerDepreciationDevelopmentDirectorsDirectors LoansDirectorsloansDisallowable Business ExpensesDiscoveryDividend allowanceDividend Allowance ReductionDividend PlanningDividendallowanceDLADomestic Items Tax ReliefDormantcompanyEmployee DiscountEmployee managementEmployeecompensationpaymentsEmployeeOwnershipTrustEndoflifeplanningEnquiryEnterpriseResourcePlanningEntertainmentEntrepreneurmindsetEquityExpenses Allowed For TaxExtrabenefitEyetestsFHLsFlippingFurnished Holiday Lets TaxGift AidGift AllowanceGrowthhacksHelp to pay tax billsHICBCHMO Licensing FeesHMRC complaintsHoldoverreliefHoliday Lettings TaxHow to apply for a Business LoanHow to Extract ProfitHumourHybridIllegaldividendsIncomeInflationary GainsInfluencersInheritance Tax Nil Rate BandInterest RatesInterestreliefInterestrestrictionISAJoint TenantKeypersoninsuranceLandlord RepairsLandlords Self AssessmentLate vat registrationLBTTLeadgenerationLeadmagnetLeanbusinessmodelLetting Agent DisbursementsLetting Agent RecharresLettingsLettings ReliefLimitedcompanyLiquidation DemergerLoaninterestLong Lets TaxLongserviceLTTMainresidencereliefManaged LetsManagement accountingMaritalhomedivorceMarriage allowanceMarriageallowanceMileage paymentMinimumwageMixedusesdltMortgage costsMortgage Interest ReliefNational InsuranceNew propertyNewcompanycarfuelratesNewnicrulesNIC 2023 to 2024NIC savingsNicdisregardNicreductionNMWNmwerrorsNon Allowable Business ExpensesNon-taxableNudgeletterOptiontotaxvatOverpayment ReliefPaperformPartnershipPartnershipbusinessesParttimePatternofoccupancyPAYE by Direct DebitPayrollingPenaltypointsPension Payments Tax ReliefPensioncontributionsPensionsPerformance-reviewsPeriodofgracePeriodsofabsencePersonal ExpensesPersonal financePersonalallowancePersonalguaranteesPostcessationreliefPretradingexpensesProfitProfit-and-lossProfitAndLossProperty AllowanceProperty Development CompanyProperty IncorporationProperty Investment CompanyProperty investor accountsProperty investor tax tipsProperty LettingProperty Rental BusinessProperty TradingPropertycompanyRecharges by Estate AgentsRegularpaymentsReliefRent your driveRentalRentaroomResearch & DevolopmentResidence ReliefResidential property gainsResidentialsdltRetail stock controlRetainedprofitsRevenueRoom for rent taxRtiSASalarySDLT changesSection 455 TaxSection455taxSelective Licences LandlordsSelf AssessmentSelf-employednicSelfemployedSelling OnlineSeperationServicechargesSettlementslegislationSimplified ExpensesSmallbizSmallbusinessratereliefSoftwareSpring BudgetStaffpartiesStamp dutySuccessJourneyTax Allowance on DrivewaysTax AllowancesTax BreakTax CodesTax DeadlinesTax DeductionsTax Filing DeadlinesTax Free ChildcareTax free incomeTax on Company VansTax positionTax ReliefTax tips for landlordsTaxbillpaymentsTaxconsequencesTaxincentivesTaxpositionTaxpositionassetsTaxreliefTaxreliefsTaxsesTerminationpaymentsTipsTrade professionalTrainingTransfer AssetsTransfer Assets Between SpousesUmbrellacompanyUndisclosedincomeUnpaid RentVAT Bad Debt ReliefVAT DeadlinesVAT DisbursementsVAT PenaltiesVAT registrationVAT Reverse ChargeVatpenaltiesVatregisteredVatregistrationthresholdWellbeingWorking from home
TAGS

Interest rates are high – Benefit from short-term loans from your company

Interest rates are high – Benefit from short-term loans from your company

The Bank of England has warned businesses and households that the cost of borrowing will remain high for at least the next two years and although taking out a bank loan is cheaper than a credit card, the interest rate on unsecured loans is at an all-time high of 5.7%. However, there is a source of finance from which a director or participator of a private limited company can borrow at 0% interest and that is from their company. As ever, there are restrictions but such a source of finance is worth considering. Such loans can have a relatively low annual tax cost and be useful (assuming the company has the money available).

A loan from the company may be a formal arrangement under which the company provides the funds and is repaid by a certain date, possibly with interest, or it may be a payment of salary in advance. Where the loan exceeds £10,000, is interest-free or at a low rate below HMRC's 'official rate' (currently 2.25%) the director or employee is generally taxable on the difference between the interest charged and the 'official rate', such loans being termed 'beneficial loans'. Even if the 'official rate' is charged, it would still be cheaper to borrow from the company at that percentage rather than a bank or credit card. The amount is declared to HMRC and confirmed to the director by 6 July after the tax year using a P11D Expenses and Benefits submission; NIC is also charged on the employer.

Borrowing from the company may not be beneficial if the loan is not repaid within nine months and one day after the company's accounting year end. If the loan remains unpaid at that date, the company is liable for an additional tax charge (referred to as the 's455 charge) equal to that payable on a dividend of the same amount taxed at the dividend upper rate (currently 33.75%). Without this charge the director could borrow money from the company indefinitely without any tax implications. Should the loan not be repaid and the charge paid, when the loan is subsequently repaid (or written off), the tax payment is refunded, usually via offset from the corporation tax bill due nine months and one day after the accounting year end in which the loan is repaid. If the loan is written off the company cannot claim a tax deduction for the write-off and consequently the shareholder will be taxed on the amount written off at their marginal dividend rate.

This means that should the director or participator be a basic rate taxpayer and the loan not repaid in time; it would be cheaper for the loan to be taxed as a dividend at 8.75% rather than the company pay the 33.75% charge. Conversely, should the director be a higher rate taxpayer, it would be cheaper for the company to suffer the s455 charge as this would ultimately be repayable on repayment/write-off of the loan. Even when the s455 charge does have to be paid, the shareholder can still end up with more initial funds through taking a loan than taking additional salary or dividends. After all, the director would have had the benefit of  an interest free loan in the meantime.

If timed effectively, it could be possible for a director of a company whose year end is, say, 30 September 2024 to take a loan from the company on 1 October 2023, and so long as the loan is repaid by 1 July 2025 (nine months and one day after the company's year end) no s455 charge will be payable.

Practical point

Under the Companies Act 2006, a loan over £10,000 usually requires shareholders’ approval. The passing of a resolution will also serve to record the date on which the loan  is made.