Loan to family from limited company
Loan to family from limited company
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Discussion

powling

Original Poster:

67 posts

131 months

Wednesday 2nd February 2022
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I run my own small limited company with a healthy cash balance.

A relative is looking to move house and may need some short term financial help (ie bridging loan). I understand if I borrow greater than £10k, then it can have tax and BIK implications etc ...

However, if I were to 'lend' them the capital and charge the IR interest (2%), and then they repay the loan say 3 months later, does this absolve me of tax / BIK bearing in mind the limited company is earning interest (which will be declared for C Tax) ?

Doofus

31,251 posts

189 months

Wednesday 2nd February 2022
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powling said:
I run my own small limited company with a healthy cash balance.

A relative is looking to move house and may need some short term financial help (ie bridging loan). I understand if I borrow greater than £10k, then it can have tax and BIK implications etc ...

However, if I were to 'lend' them the capital and charge the IR interest (2%), and then they repay the loan say 3 months later, does this absolve me of tax / BIK bearing in mind the limited company is earning interest (which will be declared for C Tax) ?
If lending money is not the primary trade of your business, you could find yourself losing entrepreneurs relief (if you currently get it).

Plus, and I'm assuming yours is a close company, then lending to a family member may well be seen as a loan to a 'participator', and attract tax as per CTA 2010, s455.

I'm out of touch with current legislation so if any of the above has changed, somebody will gleefully slap me down.

LooneyTunes

8,321 posts

174 months

Wednesday 2nd February 2022
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Oldish thread but may be worth a read: https://www.pistonheads.com/gassing/topic.asp?h=0&...

StevieBee

14,289 posts

271 months

Wednesday 2nd February 2022
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I may be wrong here but if the loan is short term and given and repaid in the same financial year then surely there's no consequence on the financial situation of the company to report and thus no tax implication. I can see why there may be if you are charging interest because that's additional revenue but as this is family, I'm assuming that any benefit would be paid in beers or a meal or something.


trickywoo

13,123 posts

246 months

Wednesday 2nd February 2022
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HMRC will view this as a Directors Loan which has well prescribed rules.

Entirely doable just make sure you know the rules.

Eric Mc

124,044 posts

281 months

Thursday 3rd February 2022
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StevieBee said:
I may be wrong here but if the loan is short term and given and repaid in the same financial year then surely there's no consequence on the financial situation of the company to report and thus no tax implication. I can see why there may be if you are charging interest because that's additional revenue but as this is family, I'm assuming that any benefit would be paid in beers or a meal or something.
If it's over £10,000 and interest charges are below the market rate, there will possibly be PAYE Benefit in Kind charges. These kick in immediately.
Payments in kind (beer, meals etc - as you state) are still benefits in kind.

StevieBee

14,289 posts

271 months

Thursday 3rd February 2022
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Eric Mc said:
StevieBee said:
I may be wrong here but if the loan is short term and given and repaid in the same financial year then surely there's no consequence on the financial situation of the company to report and thus no tax implication. I can see why there may be if you are charging interest because that's additional revenue but as this is family, I'm assuming that any benefit would be paid in beers or a meal or something.
If it's over £10,000 and interest charges are below the market rate, there will possibly be PAYE Benefit in Kind charges. These kick in immediately.
Payments in kind (beer, meals etc - as you state) are still benefits in kind.
I'm being curious rather than pernickety but presumably if no interest was charged and the loan was simply a family favour, then that would 'technically' be 'interest below the market rate' so how would PAYE be calculated on nothing? Or is it the loan amount on which it's calculated?

Plus... part of what I do is provide marketing advice. I've been helping a mate with a start up giving him the odd bit of guidance informally and for no payment. But he did treat me and my wife to a nice curry recently. Think the evening stood him for around £100. So should I get the receipt from him and account for £50 of BIK? .... On this I am being pernickety - not to you - but to the system smile



MustangGT

13,437 posts

296 months

Thursday 3rd February 2022
quotequote all
StevieBee said:
I'm being curious rather than pernickety but presumably if no interest was charged and the loan was simply a family favour, then that would 'technically' be 'interest below the market rate' so how would PAYE be calculated on nothing? Or is it the loan amount on which it's calculated?

Plus... part of what I do is provide marketing advice. I've been helping a mate with a start up giving him the odd bit of guidance informally and for no payment. But he did treat me and my wife to a nice curry recently. Think the evening stood him for around £100. So should I get the receipt from him and account for £50 of BIK? .... On this I am being pernickety - not to you - but to the system smile
The BIK would be calculated on the difference between the interest paid and the market rate of interest. If the interest charged on the £10k was 2% lower than the market rate the BIK would be calculated on the 2% x £10k x time period of loan.

Eric Mc

124,044 posts

281 months

Thursday 3rd February 2022
quotequote all
StevieBee said:
I'm being curious rather than pernickety but presumably if no interest was charged and the loan was simply a family favour, then that would 'technically' be 'interest below the market rate' so how would PAYE be calculated on nothing? Or is it the loan amount on which it's calculated?

Plus... part of what I do is provide marketing advice. I've been helping a mate with a start up giving him the odd bit of guidance informally and for no payment. But he did treat me and my wife to a nice curry recently. Think the evening stood him for around £100. So should I get the receipt from him and account for £50 of BIK? .... On this I am being pernickety - not to you - but to the system smile
There are plenty of tax laws surrounding gifts, benefits, etc - covering PAYE, VAT, Corporation Tax and Income Tax. There are also laws in respect of bribery, money laundering etc.
There are almost too many such laws and many businesses pay scant attention to them. Like all laws, they are rarely enforced by the relevant government authorities (whether HMRC or somebody else).

In recent decades, the UK has become very proficient at creating onerous legislation - but has also become very poor at enforcing this legislation.

powling

Original Poster:

67 posts

131 months

Thursday 3rd February 2022
quotequote all
Thanks for everyone's replies !!

The loan is likely to be in the region of £250,000 to my mum to buy a property before she sells hers ... I would expect the term of the loan being 3 months maximum.

My understanding was a loan over £10,000 (to a connected / close family member) that was interest free was subject to BIK or could be classed as income/dividend etc.

Therefore, I though if I treated it more like a loan with interest charged at the Inland Revenue rate of 2%, then this would avoid the potential of BIK or other taxes on myself.

I've put a call into my own Accountant for his view, but he's normally pretty busy this time of year !!

Jenny Tailor

1,727 posts

53 months

Friday 4th February 2022
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I'm not an expert here - but HMRC will be on you like a rash for a £250K loan.

Surely it must raise some flags?

Eric Mc

124,044 posts

281 months

Friday 4th February 2022
quotequote all
powling said:
Thanks for everyone's replies !!

The loan is likely to be in the region of £250,000 to my mum to buy a property before she sells hers ... I would expect the term of the loan being 3 months maximum.

My understanding was a loan over £10,000 (to a connected / close family member) that was interest free was subject to BIK or could be classed as income/dividend etc.

Therefore, I though if I treated it more like a loan with interest charged at the Inland Revenue rate of 2%, then this would avoid the potential of BIK or other taxes on myself.

I've put a call into my own Accountant for his view, but he's normally pretty busy this time of year !!
Your accountant should be through the worst of his/her 31 January deadline pressure now so don't put off talking to him/her.

If the company charges a normal commercial rate of interest on the loan then the Benefit in Kind charge should be avoided.

Loans such as these have a habit of staying on the books of the company a lot longer then originally planned so assuming that all will be done and dusted within 3 months is (in my view) wishful thinking - especially if the existence of the loan is tied into a property transaction.

The other thing, not mentioned up to now, is the statutory requirement that a loan like this needs to be disclosed in the notes to the statutory accounts. In other words, you have a legal requirement as a director to provide full details of the loan, i.e that it exists/existed, how much it was for, what the terms and conditions are/were and what the outstanding balance was at the financial year end date. Also, as it is a "connected party" loan, then the nature of the "connection" must also be declared in the notes to the accounts. These full accounts are normally part of the submission of supporting data given to HMRC when the Corporation Tax return is being submitted.

Alpinestars

13,954 posts

260 months

Friday 4th February 2022
quotequote all
powling said:
Thanks for everyone's replies !!

The loan is likely to be in the region of £250,000 to my mum to buy a property before she sells hers ... I would expect the term of the loan being 3 months maximum.

My understanding was a loan over £10,000 (to a connected / close family member) that was interest free was subject to BIK or could be classed as income/dividend etc.

Therefore, I though if I treated it more like a loan with interest charged at the Inland Revenue rate of 2%, then this would avoid the potential of BIK or other taxes on myself.

I've put a call into my own Accountant for his view, but he's normally pretty busy this time of year !!
If interest is charged at less than the official rate, a benefit in kind arises to you. And class 1A NIC to the company, on the benefit in kind amount. Eg, if there’s no interest charged, your BIK will be 250,000@2%*3/12 = 1,250. NIC for the company of a couple of hundred quid.

There could also be taxable income in the company, depending on which accounting standards it uses, of the amount of the BIK.

If you charge interest at the official rate, the only implication is that the company has taxable interest income. No BIK or NIC.

It’s highly unlikely to impact “entrepreneurs’ relief” (BADR) as suggested above.

Eric Mc

124,044 posts

281 months

Friday 4th February 2022
quotequote all
Jenny Tailor said:
I'm not an expert here - but HMRC will be on you like a rash for a £250K loan.

Surely it must raise some flags?
They won't be over this "like a rash" for the simple reason that HMRC is a non-functioning entity these days and is incapable of doing its job any more.

However, the company does have statutory disclosure requirements which are supposed to put the onus on making the right type of declarations in the accounts - as outlined above.

In other words, it is the directors' legal obligations to self declare such financial arrangements. If they fail to do so, they may fall foul of HMRC - but most likely HMRC would do nothing because they haven't got the ability or resources anymore to chase this type of situation up.

DaveA8

695 posts

97 months

Monday 7th February 2022
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I think the reason people get worried about things like this is because often a short term loan becomes a long term loan but if your mother is not shareholder nor has any involvement in the business, treat as a commercial transaction and earn a bit of interest, pay a few quid to draft a loan agreement and get her to pay that and a small bit of interest.
That way there is an element of commerciality and btw get her to pay the money back!
I say this as I loaned my brother some money and the friendly local compliance people tutted and tutted and needed to see an agreement (which I had), threatened all sorts and lost interest in that, then again it might have been due to the fact there was relatively low hanging fruit of cars and a partnership, to be fair they weren't up for fight on that but suggested maybe the partnership had run its course and be amalgamated into the business. Ever the reader of subtle hints, I took that hint.

Eric Mc

124,044 posts

281 months

Monday 7th February 2022
quotequote all
I presume you ensured all the compliance notes in the accounts were completed properly too?

If it's a "Close Company and the loan is to a relative of a director of the company, then those notes need to be completed for full disclosure in the statutory accounts.

DaveA8

695 posts

97 months

Tuesday 8th February 2022
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Eric Mc said:
I presume you ensured all the compliance notes in the accounts were completed properly too?

If it's a "Close Company and the loan is to a relative of a director of the company, then those notes need to be completed for full disclosure in the statutory accounts.
I'm largely ambivalent about accountants because my experience has been they struggle to deal with HMRC, often preferring to avoid , which is great until they appear. In this case at my request some years prior, we had listed in short, succinct notes anything related to Partnership arrangements and in the year in question had made specific notes re loans.
This clearly prompted the enquiry but since previous years were open about the Partnership and the Partnership accounts were filled and in fact the partnership accounts noted the company as their only source of income ( at that time), The Inspector had nothing to discover, add the fact that my DLA was in credit more than the loan to my brother at all times, again nothing.
What I did learn from HMRC was that they are largely uncontrolled, anyone who kids themselves that the internal complaints procedure is any kind of protection is sadly going to be disappointed.
I had a spat with 2 Inspectors where my Accountant and the Firms Tax specialist agreed a meeting with them and told me to attend. At the meeting, I asked my Accountant and HMRC had the agenda been sent and agreed, it had not so I said leave the list of questions and walked out.
With 2 weeks, I had a letter at home telling me about an enquiry into my personal Tax return, my wives tax return.
I looked on the linkedin, the Inspector on my enquiry had the company Inspector on his list.
Two Sch36 notices re my personal Tax return, I appealed to the tribunal and a few weeks before the Tribunal all notices withdrawn.
As for the company, they had clear notice of the relationship and even the Hypothetical Inspector couldn't have "discovered" what was in plain sight.
Anyway as I say I took the hint.
The issue i had with the Accountants was that they either wanted to gloss over it or bury it in 3 pages of notes, neither will cut it, I re called a case where the Judge, I assume it was after the UTT rejected to notes as there was no way it was reasonable for an Inspector to have trawl through.

Eric Mc

124,044 posts

281 months

Tuesday 8th February 2022
quotequote all
The fact that HMRC opened an investigation into the affairs of the company indicates to me that what you did raised massive alarm bells.

I feel my job as an accountant is to prevent those alarm bells from going off in the first place.

Yes, I desperately hate dealing with HMRC (most accountants do) and I will do all in my power to prevent my clients from falling into their clutches.

Alpinestars

13,954 posts

260 months

Tuesday 8th February 2022
quotequote all
DaveA8 said:
I'm largely ambivalent about accountants because my experience has been they struggle to deal with HMRC, often preferring to avoid , which is great until they appear. In this case at my request some years prior, we had listed in short, succinct notes anything related to Partnership arrangements and in the year in question had made specific notes re loans.
This clearly prompted the enquiry but since previous years were open about the Partnership and the Partnership accounts were filled and in fact the partnership accounts noted the company as their only source of income ( at that time), The Inspector had nothing to discover, add the fact that my DLA was in credit more than the loan to my brother at all times, again nothing.
What I did learn from HMRC was that they are largely uncontrolled, anyone who kids themselves that the internal complaints procedure is any kind of protection is sadly going to be disappointed.
I had a spat with 2 Inspectors where my Accountant and the Firms Tax specialist agreed a meeting with them and told me to attend. At the meeting, I asked my Accountant and HMRC had the agenda been sent and agreed, it had not so I said leave the list of questions and walked out.
With 2 weeks, I had a letter at home telling me about an enquiry into my personal Tax return, my wives tax return.
I looked on the linkedin, the Inspector on my enquiry had the company Inspector on his list.
Two Sch36 notices re my personal Tax return, I appealed to the tribunal and a few weeks before the Tribunal all notices withdrawn.
As for the company, they had clear notice of the relationship and even the Hypothetical Inspector couldn't have "discovered" what was in plain sight.
Anyway as I say I took the hint.
The issue i had with the Accountants was that they either wanted to gloss over it or bury it in 3 pages of notes, neither will cut it, I re called a case where the Judge, I assume it was after the UTT rejected to notes as there was no way it was reasonable for an Inspector to have trawl through.
Not sure I understand much of that. Partnership of a corporate? Disclosure in the financial statements forms part of disclosure for tax purposes. It’s as simple as that.

DaveA8

695 posts

97 months

Tuesday 8th February 2022
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[quote=Alpinestars]

Partnership of a corporate?

That's your term not mine,

I was a director and shareholder of a limited company and at the same time a Partner in an LLP.
The LLP supplied services to the Ltd Co.
Anyone who's filled in a tax return will know there is a white page usually at the end but sometimes after a specific section and what you put in there is very important because it's the difference between 1yr and 1 day and anywhere between 4 to 20 yrs of tax.