Question:

“I am a contractor trading through a limited company and currently using up my entire basic rate tax band. My company has built up a significant amount of profits and I am looking to borrow £50,000 from my company as part of a house deposit. What are the tax implications?”

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Answer:

If you were to borrow £50,000 from your company you would at this point have an overdrawn director’s loan account (assuming you didn’t already have a director’s loan account balance).

You could clear this down with further dividends (subject to available profits, which it sounds like is not an issue) triggering a personal tax charge as all dividends would be subject to the higher rates of income tax. In the example below we will assume that you choose to leave the directors loan account overdrawn.

An overdrawn director’s loan account in your circumstance has the following characteristics:

  • In order to avoid Benefit-In-Kind issues interest must be charged on all amounts over £10,000 at the official HMRC rate of 2.5% annually (rate correct as at 6th April 2017). This interest income to the company is liable to corporation tax.
  • The amount outstanding at any accounting period end must be disclosed in the filed abbreviated accounts at companies house.
  • Any amount remaining outstanding (i.e. not cleared by way of dividends or a personal cash injection) nine months after the period end is subject to section 455 tax (s455).

Section 455 tax is a form of temporary corporation tax paid by the company along with their corporation tax liability. Currently this amount is 25% of the outstanding loan (UPDATE: from 6th April 2016 this increases to 32.5% and from 6th April 2022 it increases to 33.75%)

In the above example an overdrawn director’s loan account of £50,000 at 31 December 2014 (let’s assume that’s the period end) if not repaid by 30 September 2015 would trigger a further temporary tax charge of £12,500 (s455) payable by the company.

Once the amount is repaid the company has a right to this tax back – however this is not automatic and can take several months from the date of repayment.

You may think It is tempting to simply move cash around from your personal account to repay the company just before the year end with the aim of shifting this money back to yourself after the year end to avoid the above temporary s455 tax. HMRC have recently introduced general anti-avoidance legislation to stop this (it’s referred to as ‘bed and breakfasting’) and as such this is not allowed.

Borrowing money from your company can still in the right circumstances be an efficient way of getting a loan, especially in the short to medium term where you are pretty certain you will find yourself in a position to repay either via dividends or future cash lump sums. It is however quite a complicated issue with a few different moving parts and we would advise you to consult an Accountant to ensure it is suitable for you.