You can borrow up to £10,000 interest free from your company without triggering an income tax charge. However, your company might not be so lucky. Strict anti-avoidance rules can result in extra tax charges. How can you legitimately dodge them?
Company money
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.
Company tax
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% (33.75% from April 2022) 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 Acom 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 Acom’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 Acom and repays his relative. This triggers the anti-avoidance trap – the 32.5% tax charge is not avoided.
An escape plan
The trap in our example only applies if the amount of actual or planned temporary borrowing used to repay your company exceeds £15,000. You can use this to your advantage.
Tip. You can borrow up to £10,000 interest free from your company for 21 months without any tax charges for you or your company arising. You could borrow it entirely tax free for longer if you follow some simple rules.
Tip. After the 21-month tax-free period use temporary funding, say a loan from a relative or an overdraft, to repay the company. After 30 days borrow again from your company and repay the temporary funding.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.