Director Loan to LTD Co BTL - repayments tax deductible?
Discussion
Morning all - hopefully a simple question based on the below scenario:
I set up a ltd co and through that co, purchase a BTL for circa £240K.
The deposit for which come from my (as sole director) lending the ltd co circa £60K.
The question is, can the company repay the Director loan through the rental income, and do those loan repayments counts as a tax deductible annual expense of the company, thereby reducing the "profit" the ltd co makes per annum for corp tax calculation purposes....
Secondly, what are the implications of that loan repayment as "income" to me as the director where I am already a higher rate tax payer through my PAYE day job?
I'm not particularly bothered about taking a salary out of the company, but realise the to take all "income" from the ltd co as a dividend might be problematic...
Thanks - Nick.
I set up a ltd co and through that co, purchase a BTL for circa £240K.
The deposit for which come from my (as sole director) lending the ltd co circa £60K.
The question is, can the company repay the Director loan through the rental income, and do those loan repayments counts as a tax deductible annual expense of the company, thereby reducing the "profit" the ltd co makes per annum for corp tax calculation purposes....
Secondly, what are the implications of that loan repayment as "income" to me as the director where I am already a higher rate tax payer through my PAYE day job?
I'm not particularly bothered about taking a salary out of the company, but realise the to take all "income" from the ltd co as a dividend might be problematic...
Thanks - Nick.
If you charge the company interest on the loan this is regarded as income under the "personal savings allowance" umbrella as you're getting interest from a company bond.
As you are a higher rate taxpayer you get the first £500 of this income tax free. And, it is deductible under CT rules.
As you are a higher rate taxpayer you get the first £500 of this income tax free. And, it is deductible under CT rules.
Thanks all,
So basically it comes down to a balance between how much I want to pay myself back, vs. how much I want to leave cash in the business.
Interesting that I can charge the ltd co interest, but that leaves with a personal tax liability. probably more complication than its worth...
So basically it comes down to a balance between how much I want to pay myself back, vs. how much I want to leave cash in the business.
Interesting that I can charge the ltd co interest, but that leaves with a personal tax liability. probably more complication than its worth...
NicoG said:
Thanks all,
Interesting that I can charge the ltd co interest, but that leaves with a personal tax liability. probably more complication than its worth...
I always am slightly amazed that people seem to be surprised by this.Interesting that I can charge the ltd co interest, but that leaves with a personal tax liability. probably more complication than its worth...
If you, as an individual, receive interest from an entity (it doesn't matter what that entity is i.e. whether it is a bank, building society or a company of which you own the shares) , then you, as an individual will be liable to Income Tax on that interest. Conversely, the entity paying the interest will be able to claim tax relief on those interest costs.
Be aware that, at the moment, an individual can receive up to £1,000 per annum (from all sources) without a tax liability arising. However, they should return the interest amounts on their personal Self Assessment tax returns, even if they ultimately don't have top pay any Income Tax on the interest.
Eric Mc said:
I always am slightly amazed that people seem to be surprised by this.
If you, as an individual, receive interest from an entity (it doesn't matter what that entity is i.e. whether it is a bank, building society or a company of which you own the shares) , then you, as an individual will be liable to Income Tax on that interest. Conversely, the entity paying the interest will be able to claim tax relief on those interest costs.
Be aware that, at the moment, an individual can receive up to £1,000 per annum (from all sources) without a tax liability arising. However, they should return the interest amounts on their personal Self Assessment tax returns, even if they ultimately don't have top pay any Income Tax on the interest.
Hi Eric - now it seems totally logical; it's income after all... If you, as an individual, receive interest from an entity (it doesn't matter what that entity is i.e. whether it is a bank, building society or a company of which you own the shares) , then you, as an individual will be liable to Income Tax on that interest. Conversely, the entity paying the interest will be able to claim tax relief on those interest costs.
Be aware that, at the moment, an individual can receive up to £1,000 per annum (from all sources) without a tax liability arising. However, they should return the interest amounts on their personal Self Assessment tax returns, even if they ultimately don't have top pay any Income Tax on the interest.
I guess I've just not considered the scenario in enough detail to realise it until now....
As I said though, probably more hassle than it's worth if this single source of income is the only thing that dictates a self assessment would be necessary over and above my PAYE situation.
Obviously the Ltd co finances would need to be done annually by an accountant, but charging interest on the director loan seems to add a layer of complexity that doesn't seem worth the benefit of so doing...
NicoG said:
Eric Mc said:
I always am slightly amazed that people seem to be surprised by this.
If you, as an individual, receive interest from an entity (it doesn't matter what that entity is i.e. whether it is a bank, building society or a company of which you own the shares) , then you, as an individual will be liable to Income Tax on that interest. Conversely, the entity paying the interest will be able to claim tax relief on those interest costs.
Be aware that, at the moment, an individual can receive up to £1,000 per annum (from all sources) without a tax liability arising. However, they should return the interest amounts on their personal Self Assessment tax returns, even if they ultimately don't have top pay any Income Tax on the interest.
Hi Eric - now it seems totally logical; it's income after all... If you, as an individual, receive interest from an entity (it doesn't matter what that entity is i.e. whether it is a bank, building society or a company of which you own the shares) , then you, as an individual will be liable to Income Tax on that interest. Conversely, the entity paying the interest will be able to claim tax relief on those interest costs.
Be aware that, at the moment, an individual can receive up to £1,000 per annum (from all sources) without a tax liability arising. However, they should return the interest amounts on their personal Self Assessment tax returns, even if they ultimately don't have top pay any Income Tax on the interest.
I guess I've just not considered the scenario in enough detail to realise it until now....
As I said though, probably more hassle than it's worth if this single source of income is the only thing that dictates a self assessment would be necessary over and above my PAYE situation.
Obviously the Ltd co finances would need to be done annually by an accountant, but charging interest on the director loan seems to add a layer of complexity that doesn't seem worth the benefit of so doing...
& check your loan/mortgage agreement, some will have a condition of lend that you do not reduce/withdraw the director loan balance.
Good luck!
The company can, of course, repay to you the capital amount of any loan that you made to the company.
As it is a strict loan repayment, you are not receiving any income as such (you are just getting back what you gave to the company in the first place). Conversely, the company is not paying out any kind of expenditure or cost. It's just giving back to the lender what it received from the lender originally.
I lend you £10,000 - you pay me back the £10,000. HMRC is not interested as there is no income and there is no expenditure going on.
As it is a strict loan repayment, you are not receiving any income as such (you are just getting back what you gave to the company in the first place). Conversely, the company is not paying out any kind of expenditure or cost. It's just giving back to the lender what it received from the lender originally.
I lend you £10,000 - you pay me back the £10,000. HMRC is not interested as there is no income and there is no expenditure going on.
Deesee said:
& check your loan/mortgage agreement, some will have a condition of lend that you do not reduce/withdraw the director loan balance.
Good luck!
I totally get that - I would not seek to reduce the equity that the ltd co held in the asset, no way. Good luck!
It would have to be paid back from profit so that the "deposit" stayed at "at least £60K".
Doing this would hopefully mean that in the fullness of time, the LTV would improve, allowing access to better rates at remortgage time (notwithstanding the fact that they are probably heading upwards in general...) all the more reason for the company to accumulate cash and need to borrow less, even if interest only....
NicoG said:
Deesee said:
& check your loan/mortgage agreement, some will have a condition of lend that you do not reduce/withdraw the director loan balance.
Good luck!
I totally get that - I would not seek to reduce the equity that the ltd co held in the asset, no way. Good luck!
It would have to be paid back from profit so that the "deposit" stayed at "at least £60K".
Doing this would hopefully mean that in the fullness of time, the LTV would improve, allowing access to better rates at remortgage time (notwithstanding the fact that they are probably heading upwards in general...) all the more reason for the company to accumulate cash and need to borrow less, even if interest only....
Your "deposit" will actually sit as a liability on the balance sheet (as the co owes money), like your mortgage/loan will.
The full value of the property will sit as an asset.
Be very careful as your withdrawing funds (via PAYE/DIVS/LOAN), that you don't "overdraw" the company financial accounts and put it into negative net worth, (funders don't like this).
LTV is somewhat important, but when you look to renew the loan (or extend the term) the RIG (rental income gearing)/ DSCR (debt service cover ratio) will be as if not more important, lets say at the moment (look at your agreement) they will want a minimum of 125%, this could move up with regulatory changes, or will be £ increased if interest rates move up over the next say 5 yrs.
When you submit your renewal application, they may ask for the set of accounts which will show any voids/non payment of rent (via the turnover) and show any funds withdrawn (PAYE/DIVS/LOANs).
Best practice here is to work to a stressed base interest rate of say 5% + the margin they are charging you & allowing a contingency fund for repairs/renewals before removing any funds.
If in doubt speak to a regulated broker (one that reg does LTD co BTL), and your accountant.
Deesee said:
Remember this is a ltd co, and a ltd co loan.
Your "deposit" will actually sit as a liability on the balance sheet (as the co owes money), like your mortgage/loan will.
The full value of the property will sit as an asset.
Be very careful as your withdrawing funds (via PAYE/DIVS/LOAN), that you don't "overdraw" the company financial accounts and put it into negative net worth, (funders don't like this).
LTV is somewhat important, but when you look to renew the loan (or extend the term) the RIG (rental income gearing)/ DSCR (debt service cover ratio) will be as if not more important, lets say at the moment (look at your agreement) they will want a minimum of 125%, this could move up with regulatory changes, or will be £ increased if interest rates move up over the next say 5 yrs.
When you submit your renewal application, they may ask for the set of accounts which will show any voids/non payment of rent (via the turnover) and show any funds withdrawn (PAYE/DIVS/LOANs).
Best practice here is to work to a stressed base interest rate of say 5% + the margin they are charging you & allowing a contingency fund for repairs/renewals before removing any funds.
If in doubt speak to a regulated broker (one that reg does LTD co BTL), and your accountant.
Can anyone recommend a decent broker that will offer BTL to LTD companies?Your "deposit" will actually sit as a liability on the balance sheet (as the co owes money), like your mortgage/loan will.
The full value of the property will sit as an asset.
Be very careful as your withdrawing funds (via PAYE/DIVS/LOAN), that you don't "overdraw" the company financial accounts and put it into negative net worth, (funders don't like this).
LTV is somewhat important, but when you look to renew the loan (or extend the term) the RIG (rental income gearing)/ DSCR (debt service cover ratio) will be as if not more important, lets say at the moment (look at your agreement) they will want a minimum of 125%, this could move up with regulatory changes, or will be £ increased if interest rates move up over the next say 5 yrs.
When you submit your renewal application, they may ask for the set of accounts which will show any voids/non payment of rent (via the turnover) and show any funds withdrawn (PAYE/DIVS/LOANs).
Best practice here is to work to a stressed base interest rate of say 5% + the margin they are charging you & allowing a contingency fund for repairs/renewals before removing any funds.
If in doubt speak to a regulated broker (one that reg does LTD co BTL), and your accountant.
bradders said:
Can anyone recommend a decent broker that will offer BTL to LTD companies?
I've found much useful looking info on the website of "Mortgages for Business".Also had a quick chat to them about large HMO options and the chap seemed pretty clued-up.
Can't say I've actually been through the process with anyone though....
Also I recently had look at Shawbrook - they seem to offer a "computer says no"- Free service; real human beings making decisions based on individual circumstances. which is interesting to me ...
Hopefully other can give more specific pointers...
HTH though - Nick.
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