19 August 2015    |    Taxation

Tax saving on company loans

A tax-saving tip for a company loan

The personal tax cost of any company loan you receive is currently low. When the time comes to repay the loan there’s a simple trick you can use to reduce it further. What is this trick and how does it work?

Taxable benefit out the taxable BiK.

As you will know, if you borrow from your company you can be taxed on a benefit in kind (BiK), but relatively small loans are exempt. Only where the balance exceeds £10,000 at any point during a tax year does the charge apply.

Example. Brian is a director of a limited company.  In April 2017 he uses £100,000 of the company’s money as a bridging loan to pay for an extension to his home. In March 2018 he repays the money to the company using money from a bank loan. Brian’s director’s loan account is therefore taxable as a BiK.

Calculating the tax

HMRC’s standard method of calculating the tax payable on a company loan starts with taking an average balance for the tax year and applying its official interest rate of 3.25% per annum.

This is done by adding together the balances at the beginning of the tax year [or when the loan commenced if that’s later] and the end of the tax year  [or when the loan ended] and dividing this by two.

Because the balance is taken to be the maximum amount owing on all the relevant days it can result in more tax being due than you might otherwise expect.

Pay off the balance of your company loan

Using the same facts as in the example above, and  assuming Brian cleared his loan account in March 2018, the BiK calculated under HMRC’s standard method is time-apportioned to relate just to the months where there’s a balance on his loan account. The table shows how HMRC would work the taxable BiK.

[table]

Balance at 6/4/2017,”£100,000″

Balance 6/3/2018 (paid off),nil

Average balance,”£100,000″

“Taxable BiK £100,000 x 11/12 x 3.25%”,”£2,978″

[/table]

An average tax saving

If, instead, David had not repaid the loan in full, but left just a small amount Outstanding, then using the standard method the BiK would be calculated like this:

[table]
Balance at 6/4/2017,”£100,000″
Balance 6/3/2018 (paid off),£200
Average balance,”£50,200″
“Taxable BiK £50,200 X 3.25%”,£1,630
[/table]

If you intend to repay a loan from your company, leave a small balance outstanding until after the year has ended. By doing this, the BiK is reduced. What’s more, as long as the balance you leave doesn’t exceed £10,000, it won’t by itself count as a BiK in the year following that in which you repay most of the loan.

HMRC override

The bad news is that HMRC can replace the standard method of calculation and instead work out the BiK based on the average of the actual balance of the loan on each day.

This will usually result in you losing the tax advantage. However, it’s difficult for HMRC to spot what has happened, and even if it does, it’s rare that it will bother to attack the arrangement, so there’s a good chance our tax-saving tip will work.

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