Borrowing From Your Company – Keep The Tax Cost Down
Directors can indefinitely borrow up to £10,000 interest free from their companies at no tax cost to themselves. The trouble is the company will have to pay tax and tough anti-avoidance rules apply. Is there a way to legitimately avoid them?
As a director shareholder of a company it’s fair to say that the net value of its assets belongs to you. However, as HMRC is keen to point out, in law a company is a separate “person”. This means whenever you take cash or assets from it there are tax consequences. This includes borrowing money, for which special tax rules apply rules.
What’s your personal tax-free limit?
A director, employee or shareholder can borrow up to £10,000 interest free without any tax or NI charge applying. This is quite a useful buffer if you’re in need of some cash quickly and your company has it, say to pay off the Christmas credit card bill.
Tip. As long as you never owe your company more than £10,000 on which you pay low or zero interest, you won’t pay tax. If it goes above that the whole loan, not just the excess over £10,000, is a taxable benefit
Indefinite personal use of your company’s cash (within the limit) poses no tax issues for you, but your company will eventually be liable to pay a temporary tax charge until the money is repaid. The charge is equal to 32.5% of the money you borrowed and still owe nine months after the company’s financial year end. There are also rules preventing avoidance of the charge where you borrow more money from your company to repay the original debt within the nine-month period, i.e. you refresh the loan so that the nine-month rule is never triggered.
Trap. If you repay a debt and within 30 days before or after the repayment you borrow more money from your company, HMRC will ignore the repayment. Also if you arrange temporary borrowing from elsewhere to achieve the same result, the repayment will be ignored.
Example. Tim borrowed £18,000 from his company ABC Ltd which he still owes almost nine months after the financial year in which he borrowed it. Tim arranges to borrow £18,000 from a relative. 30 days after ABC’s year end the relative lends the money to Tim which he uses to repay the debt. 30 days later he borrows £18,000 from ABC and repays his relative. This triggers the anti-avoidance trap – the 32.5% tax charge is not avoided.