Q. I am looking to buy a house and I have money available in my business which is operated as a company, can I borrow money from the company to pay the deposit on this house?
A. When borrowing money from your company, there are a few legal and tax implications that need to be considered.
When a loan is made from a personal company to a shareholder, it must be repaid to the company within 9 months from the end of the company’s accounting period to avoid a tax charge. A charge of 32.5% is applied to the amount of the loan outstanding after the 9 months, payable by the company. The charge paid by the company can be recovered when the loan is repaid by the shareholder (subject to certain time limits) however, the initial tax charge may have an effect on the cash flow position of the company.
If the loan from the company to the shareholder is interest free or below the official level of interest set by HMRC (currently 3.25%), a benefit in kind may arise on the loan and there may be Income Tax and National Insurance implications for the company and the shareholder. The difference between the interest which would be paid at the official rate and the actual amount charged will be taxable on the shareholder at their marginal rate of tax. In addition, the company will pay Class 1A National Insurance on the amount at 13.8%.
HMRC also has rules regarding the repayment of director’s loan accounts. When a loan in excess of £5,000 is repaid to the company by the shareholder, there are tax implications if a further loan in excess of this amount is taken, in a subsequent accounting period, within 30 days. In this instance, relief for the repayment of the loan is only given where the repayment exceeds the additional advance taken out within the 30 day period of the repayment. This restriction will not apply where the amount repaid is subject to income tax. This would typically occur when a dividend or bonus is paid to ‘clear’ the director’s loan account.
There are a number of factors that should be consider in relation to all of the above, and detailed advice, taking into account individual circumstances, should always be obtained.
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