Many people believe that borrowing money from your company is a big tax no-no, but it can often work out far cheaper than taking a mortgage or bank loan.
As regular readers will know, with the new tax charges on landlords, many people are now looking to purchase investment properties through a limited company, as this can often work out more tax-efficient.
However, what if you are moving home and need to take a mortgage to assist with the purchase? Could a loan from your company be worth considering?
Tax Implications
Let’s start by looking at the tax implications of borrowing money from your company. There are two main implications to consider:
- You will be assessed on a benefit in kind equal to the loan amount multiplied by the official rate of interest (currently 2.25%). You will pay personal tax on this benefit in kind, and your company will pay 13.8% Class 1A National Insurance on the benefit too.
- If you do not repay the loan to the company within 9 months and 1 day of the end of the financial year in which the company granted you the loan, then the company must pay a Section 455 Tax charge equal to 33.75% of the outstanding loan amount. This tax is repaid to the company as and when the loan is repaid. Effectively, the charge amounts to the higher rate of income tax charged on dividends.
This is best explained with an example: Jeremy is moving to a bigger house and needs to borrow £200,000 to help fund the purchase. He runs a company that has plenty of cash reserves, but he doesn’t want to withdraw extra salary or dividends from the company due to the personal tax he would pay on the extra income. He currently draws a small salary of £8,000 plus £35,000 of dividends from the company each year, and he has no other sources of income.
If he borrows £200,000 from the company interest-free, then he will be assessed on a benefit in kind of £4,500 per annum (i.e., £200,000 x 2.25%). After taking his £8,000 salary into account, he has the balance of his personal allowance of £12,570 available to offset against the benefit in kind. Since the benefit in kind does not exceed the remaining personal allowance, he has no additional personal tax to pay.
However, this benefit in kind will push his total income up, but since it remains below the higher rate tax threshold, his dividend tax is not impacted by this benefit. His dividend income will continue to be taxed at the basic rate of 8.75%.
His company will also have to pay Class 1A NIC at 13.8% on the benefit of £4,500, which equates to £621 per annum. After allowing for Corporation Tax relief on this at 19%, the cost to the company is £503.01 per annum (£621 – £117.99). So, this cost needs to be borne in mind too. Even with this cost, from a tax perspective, having a company loan could still compare favorably to taking a mortgage, depending on mortgage interest rates.
But what about the Section 455 Tax charge? As mentioned above, the company will have to pay a Section 455 tax charge equal to 33.75% of the £200,000 loan to HMRC, which amounts to £67,500. This will be due 9 months and 1 day after the end of the accounting year in which the loan was taken.
The company will be able to recover the £67,500 in the future as and when the loan is repaid to the company by Jeremy. Section 455 Tax is usually therefore best described as depositing money with HMRC rather than it being a tax charge in the usual sense. It is therefore a vital cash flow consideration for the company and may put many people off, but it isn’t a cost as such.
What else should you consider? Borrowing money from your company is far more flexible than taking a mortgage as you can repay it at your own pace and you don’t have to prove your income or pass affordability tests as you would with a mortgage either. However, it really only works for owners of smaller companies as you could find it hard to get all the shareholders to agree to the loan in a larger company!
Key Facts:
- Borrowing money from your company could be a good alternative to a mortgage
- The loan will be a benefit in kind, which is subject to personal tax for the borrower (though in this specific scenario, Jeremy’s unused personal allowance covers the benefit)
- The company also has to pay 13.8% NIC on the value of the benefit each year, which after corporation tax relief amounts to £503.01
- Plus the company has to pay a 33.75% Section 455 Tax on the loan, but this is recoverable
- This strategy is more flexible than a mortgage and avoids the need for income proof or affordability tests
