Fund your business with tax-efficient personal borrowing
Your business needs a vehicle and some equipment. It will have to borrow to make these purchases. You personally have the cash which you could lend to the business, but might there be a more tax-efficient option?
Tax for couples
Being married or in a civil partnership can have tax advantages but generally every person is taxed separately. This means that transactions between one individual and another can have tax consequences for both. For example, if you borrowed money from your spouse, civil or unmarried partner and paid them interest it would count as their taxable income. Interestingly, in the right circumstances this can work to your advantage.
Qualifying loans
While interest received is taxable on the recipient, it’s tax deductible for the payer where the loan it relates to is a qualifying one. For example, subject to conditions, a loan is qualifying if it’s used to buy shares in a trading company, or provide it with funds to buy equipment or working capital. This is one situation where paying interest to your other half can give you a tax advantage, as the following examples show.
Example 1. Peter, who is a higher rate taxpayer, owns and runs his own business, Acom Ltd. It needs to finance the purchase of new machinery. Acom’s bank will lend to it but the interest rate is high. Peter could provide some of the money needed but he doesn’t want to dig into his savings. Peter’s partner Jane, a basic rate taxpayer, also has savings which could be used to provide the cash Acom needs. On advice from their accountant Jane lends Peter £90,000, which he lends to Acom and charges interest at 10% per annum.
The loan to Peter from Jane is interest free and Peter must pay tax on the interest he receives from Acom at 40%, after taking into account his savings rate tax band (£500 at 0%). He uses the loan repayments he receives from Acom to repay Jane her capital. The overall tax picture is:
| Peter | Jane | Acom | |
| £ | £ | £ | |
| Tax payable on interest received | 8,000 | - | |
| Tax relief on interest paid | - | (4,200) | |
| Net tax position | 8,000 | (4,200) |
Example 2. The circumstances are the same as our previous example except that Jane charges Peter interest at the same rate that he charges Acom. The interest Peter pays relates to a qualifying loan and so he can claim a tax deduction on the £21,000 interest he pays to Jane. Jane must pay tax on the interest she receives. Remember, she is a basic rate (20%) taxpayer and has a savings rate tax band of £1,000 at 0%.
The overall picture now shows a tax saving of £4,000 compared with Example 1, i.e. the net cost of tax in Example 1 is £3,800 compared with net tax relief of £200 in Example 2.
| Peter | Jane | Acom | |
| £ | £ | £ | |
| Tax payable on interest received | 8,000 | 4,000 | - |
| Tax relief on interest paid | (8,000) | - | 4,200 |
| Net tax position | - | 4,000 | (4,200) |
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Capital gains tax break for job-related accommodation
You’re in the process of selling a property that you bought as your home but because of your job have never lived in. You’ve been told that you’ll have to pay tax on any gain you make, but might a special relief get you off the hook?
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Should you revoke your 20-year-old option?
Your business has let out a building to a tenant and it is now just over 20 years since you opted to tax the property with HMRC. Should you revoke it so that your tenant no longer needs to pay VAT?
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Chip shop owner fined £40k for hiring illegal worker
A Surrey fish and chip shop owner has been left in shock after being fined £40,000 for allegedly employing someone who didn’t have the right to work in the UK, even though he conducted a right to work check. Where did this employer go wrong and what can you learn from it?