How you can reduce the benefit in kind charges on a loan from your business.
?As you probably know, if you borrow from your company you can be taxed on a benefit in kind (BiK). However, this charge only applies where the balance owed exceeds ?10,000 at any point during a tax year. For example, David?is a director of Acom Ltd. In April 2017 he uses ?50,000 of Acom?s money as a bridging loan to pay for an extension to his home. In March 2018 he repays the money to Acom using money from a bank loan. David?s director?s loan account is taxable as a BiK.
Calculating the tax
HMRC?s standard method of working out the tax payable is to take an average balance for the tax year and then apply it’s official interest rate. This rate is currently 2.5% per annum. HMRC calculates the average balance by adding?together and dividing by two the balances at the beginning of the tax year, or when the loan commenced if that?s later, and the end of the tax year, or when the loan ended. However, as the balance is taken to be the maximum amount owing on the days in question it can result in more tax than you might expect.
Pay off the balance
Using the example above, let’s assume that David cleared his loan account in March 2016. The benefit in kind calculated is time-apportioned to relate just to the months where there?s a balance on his loan account. The table below shows how HMRC would work out the taxable BiK:
| Balance at 6/4/2017 | ?50,000 |
| Balance 6/3/2018 (paid off) | nil |
| Average balance | ?50,000 |
| Taxable BiK ?50,000 x 11/12 x 2.5% | ?1,146 |
An average tax saving
If, instead, David had not repaid the loan in full, but left just a small amount outstanding, HMRC would calculate? the taxable BiK using HMRC?s standard method would be calculated like this:
| Balance at 6/4/2017 | ?50,000 |
| Balance 6/3/2018 (paid off) | ?200 |
| Average balance | ?25,100 |
| Taxable BiK ?25,100 x 2.5% | ?628 |
Tip:?If you intend to repay a loan from your company, leave a small balance outstanding until after the year has ended to reduce the BiK.
Furthermore, as long as the balance you leave doesn?t exceed ?10,000, it won?t by itself count as a BiK in the year following year, in which you will then repay most of the loan.
HMRC override.?The bad news is that HMRC can override the standard method of calculation and instead work out the BiK based on an average of the actual balance of the loan on each day.?You will usually lose the tax advantage as a result. However, it?s difficult for HMRC to spot, and even if it does, it?s rare that it will bother to attack the arrangement, so there?s a good chance our tax-saving tip will work.