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How far can you stretch a tax-free loan?

04/05/2017

From April directors can borrow more from their company without being taxed. The downside is that the company still faces a tax bill. As a director how can you take advantage of the new tax break without your company being hit?

Company loan recap

If you borrow money from your company there are two possible tax charges. The first is for you on a benefit in kind (BiK), but it’s relatively small. The second is on your company which is larger but only temporary. The good news is you can avoid both if you stick to certain limits and conditions.

New limit for directors – good news

Until 5 April you can borrow up to £5,000 interest free from your company without it counting as a BiK. On 6 April that limit will double to £10,000. You can have use of the money indefinitely without being taxed. But there’s a catch.

New rules for companies – bad news

New rules took effect from 20 March 2013 that aim to block director shareholders from having indefinite use of company money without it paying a tax charge. In fact, similar rules applied before that date but they were relatively easy to work around.

1. If, at the end of a company’s accounting period, a director shareholder owed it money and all or part of it was still due nine months later, the company must pay tax equal to 25% of the amount outstanding. The tax could be dodged if the director repaid the loan just before the nine months were up and then re-borrowed the money shortly after.
2. A new anti-avoidance rule applies where a company’s accounting period ends after 20 March 2013. If you repay a loan to your company and within 30 days of that borrow from it again, HMRC will ignore the repayment ever happened and so the 25% tax charge will apply.

Avoiding the 30-day trap

You could source temporary funding and use it to leapfrog the 30-day trap. Say you owed £20,000 to your company you could borrow the same sum from a relative and pay off the debt; 30 days later you can borrow £20,000 from your company and repay the relative. But this would trigger a trap.

1. HMRC spotted that dodge and so created another rule. It says that any temporary funding that’s arranged or planned at the time a director shareholder repays their company will cause the repayment to be ignored. But there’s a loophole in this new rule.

Mismatched limits

The trap applies only if the amount of actual or planned temporary borrowing used to repay a company loan exceeds £15,000. You can use the leapfrog method described above for a loan of up to that amount and the 25% tax won’t apply.

Tip 1. Taking the new rules for directors and companies together it’s possible for you to borrow up to £10,000 interest free from your company for 21 months without any tax charges arising.

Tip 2. After the 21-month tax-free period use temporary funding, say an overdraft, to repay the company loan. After 30 days borrow again from your company and repay the temporary funding . Using the tips above you could take an almost indefinite interest-free company loan of up to £10,000.

The next step

For an example of the advice in practice, visit http://tipsandadvice-tax.co.uk/download (TX 14.10.03).

From 6 April directors can borrow up to £10,000 indefinitely without incurring a tax charge. To avoid the company tax bill, obtain a temporary loan, e.g. from a relative, and repay the company loan within nine months of its accounting year end. After 30 days you can borrow from the company and repay your relative.

For any further advice please contact our team.