There are tough rules to prevent directors overusing loans from their companies. However, it’s possible to have tax-free personal use of your company’s money for up to 21 months. How is it done?
Company loan recap
If you borrow money from your company there are two possible tax charges. The first is for you on a benefit in kind (BiK), but it’s relatively small. The second is on your company which is larger but only temporary. The good news is you can avoid both if you stick to certain limits and conditions.
Rules for directors
Before 6 April 2014 HMRC allowed directors (and employees) to borrow up to £5,000 interest free from their companies without it counting as a taxable benefit in kind. From that date the tax-free amount doubled to £10,000. The loan can be for any length of time.
Rules for companies
Since 20 March 2013 rules aim to block director shareholders from having indefinite use of company money without it paying a tax charge. In fact, similar rules applied before that date but they were relatively easy to work around.
Example. If, at the end of a company’s accounting period, a director shareholder owed it money and all or part of it was still due nine months later, the company would pay tax equal to 32.5% of the amount outstanding. The tax could be dodged if the director repaid the loan just before the nine months were up and then re-borrowed the money shortly after.
Trap. An anti-avoidance rule applies where you repay a loan to your company and within 30 days of that borrow from it again. HMRC will ignore the repayment ever happened and so the 32.5% tax charge will apply.
Avoiding the 30-day trap
You could source temporary funding and use it to leapfrog the 30-day trap. Say you owed £20,000 to your company you could borrow the same sum from a relative and pay off the debt; 30 days later you can borrow £20,000 from your company and repay the relative. But this would trigger a trap.
Trap. HMRC spotted that dodge and so created another rule. It says that any temporary funding that’s arranged or planned at the time a director shareholder repays their company will cause the repayment to be ignored. But there’s a loophole in this rule.
The trap applies only if the amount of actual or planned temporary borrowing used to repay a company loan exceeds £15,000. You can use the leapfrog method described above for a loan of up to that amount and the 32.5% tax won’t apply.
Tip 1. Taking the new rules for directors and companies together it’s possible for you to borrow up to £10,000 interest free from your company for 21 months without any tax charges arising.
Tip 2. After the 21-month tax-free period use temporary funding, say an overdraft, to repay the company loan. After 30 days borrow again from your company and repay the temporary funding. Using the tips above you could take an almost indefinite interest-free company loan of up to £10,000.
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