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Kirk Rice Blog

Using A Personal Loan For BusinessWritten on July 30, 2015 by Graham Jennings

Taxing Times Questions

The Question:

I set up a new business last year and I am trading using a Limited company. I need to invest in some new equipment and stock and to do this I shall need to take a loan personally and lend it to my company. Will the interest I pay be deductible from the business profits?

Graham Jennings answers:

The interest paid is not deductible from your company profits but, you will be able to claim tax relief personally for the interest you have paid against your personal income. That income could be a salary or dividend that you have drawn from the company or in fact any interest the company pays you for the loan, i.e. you pay interest to the bank for the personal loan and your company pays you interest for the loan you have made to the company.

The only issue you may have is that it is not unusual for new businesses to be unable to pay the owner a salary in the early years of trade. Accordingly, you could find yourself with no taxable income in which to claim interest relief. In this situation, it would be important for your company to pay you interest so that you can get relief. Your company would be able to deduct the interest paid to you against its profits. Please note that that the company needs to report the payment of interest paid to individuals on a quarterly basis to HMRC.

I note that it is a loan that you are taking rather than some other form of borrowing which is important because relief is not granted where the interest is paid on an overdraft or under a credit card arrangement.

Income tax relief is available for interest payments on other categories of loan applied for the following purposes;

  • To purchase machinery or equipment used by a partnership business. However, only interest paid in the year of the loan and the next three years will qualify for tax relief.
  • To purchase more than 5% of the shares in a small family company.
  • To purchase any number of shares in a company where the borrower works for the majority of their time in the company in which shares are bought.
  • To purchase an interest in a partnership business. The individual would need to be an active partner in the business and not a sleeping partner.

 

If you would like more advice regarding this issue or any other tax matter, please contact us.
 

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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

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