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Borrowing Money From Your Business – Tax ImplicationsWritten on December 2, 2019 by Kirk Rice LLP

Borrowing Money From Your Business – Tax Implications
Taxing Times Questions

The Question:

I shall be moving to a new house in the next couple of months and I want to borrow a lump sum from my own Limited company to help finance the move. I plan to repay this towards the end of next year. Are there any tax implications in doing this?

Kirk Rice LLP answers:

Yes, two key tax issues arise from borrowing money from your business that you should be aware of which are as follows;

Firstly, you do not mention whether the loan to you will be interest free or not. Chances are you plan this to be interest free, in which case this is the first tax issue to arise. An interest free loan is a benefit in kind under tax law and so you will be taxed on the notional interest arising. Let’s take an example to illustrate the point. Say you borrow £50,000 for 12 months, the HMRC official interest rate is 2.5%. For tax purposes, a benefit in kind arises and would be calculated to be 2.5% of £50,000 which equals £1,250. You would, therefore, pay tax at your highest personal rate on £1,250, so if your total income, including the benefit amount, is within the basic rate tax band then you would pay 20% x £1,250 = £250. However, if your total income is in the higher rate then the tax charge would be £500.

Your company would also have to pay employers national insurance on the benefit at 13.8% of £1,250, which amounts to £172.50. Your company would report the benefit to HMRC on the annual form P11D. You could choose to pay interest to the company rather than have the loan interest free to avoid the benefit in kind issue.

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The second issue that arises with loans like this, is where the loan balance is still outstanding at the company’s accounting year end and remains outstanding 9 months after the year end. In this situation, the company will be required to pay a tax charge amounting to 32.5% of the loan. This tax charge is more like a tax deposit because when the loan is eventually repaid, and the conditions are correct, the company can seek repayment of this tax. When the tax is repaid depends upon when the loan is repaid and there could be quite a long period of time that elapses between repayment of the loan and obtaining a refund of the tax. The ideal situation is not to have to pay the tax in the first place and with careful timing of when the loan is drawn and then subsequently repaid will be key to that.

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Any reader interested in getting some help considering borrowing money from your business to buy a house should email info@kirkrice.co.uk to arrange a call with one of our Tax Specialists.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. The FCA does not regulate tax and trust advice.