Directors loans - costs to me and company

[VEX]

If I were to transfer some money out of the business into something that gave a higher yield, and then brought it back to the company before the end of my financial year would there be any cost or penalty for that to me or the company?

V.

[Stay in Bed Instead]

Providing that something else is in the name of the company, no. The profit on the investment would be included in your receipts.

If you thinking of transferring it to a Director, then if it's over £10,000 the Director would need to pay at least HMRC stipulated interest to the company, or it would have to be declared as a BIK.

[Deep Thought]

Stay in Bed Instead said:

Providing that something else is in the name of the company, no. The profit on the investment would be included in your receipts.

If you thinking of transferring it to a Director, then if it's over £10,000 the Director would need to pay at least HMRC stipulated interest to the company, or it would have to be declared as a BIK.

Why would it have to be in the name of the company?

A directors loan is to the director in question, surely. They would have to pay interest on it as stipulated by HMRC but outside of that i dont think theres a requirement for its end purpose to have the company's name on it.

[Stay in Bed Instead]

Deep Thought said:

Why would it have to be in the name of the company?

A directors loan is to the director in question, surely. They would have to pay interest on it as stipulated by HMRC but outside of that i dont think theres a requirement for its end purpose to have the company's name on it.

My first paragraph relates to a direct investment by the company.

My second paragraph relates to an indirect investment via a Director.

[deggles]

I was looking at this yesterday. As I understand it, for amounts over £10,000 you have to pay Class 1 NICs and income tax at your marginal rate on the Benefit In Kind amount. The BIK amount is the notional interest at the official 'beneficial loan' rate, currently 2.5%.

So for, say, a £50,000 loan you'd pay:
£50,000 * 2.5% * 13.8% = £155.25 NICs
plus
£50,000 * 2.5% * 20% = £225 tax (or £450 if you're in the 40% tax bracket)

Works out about 0.75% for me so cheap borrowing (although don't forget to factor in lost interest/opportunity cost of leaving the cash in the business)

If the loan isn't repaid in time the company will have to pay a Section 455 Corporation Tax charge, although I believe this is recoverable.

IANAA but I'm sure someone will correct me if I'm wrong. Also not sure whether you have to pay tax/NIC on the full amount or just the portion over £10k?

[Eric Mc]

S.455 is a pain. Yes, you can recover it but it can be a long and complicated process getting it back.

[VEX]

Thanks Eric, it will be easy to pull money back to the business in time for end of year and wouldn’t impact badly if it sat the for a month.

It’s just the crap ‘costs’ that get attributed through out the 11month loan period that makes its viability debatable.

[Eric Mc]

My general advice to clients is avoid overdrawn directors’ s loan accounts if at all possible.