Need extra cash? Borrow from your company tax free
As a company owner manager if you borrow cash from your company HMRC applies tax charges on you and your business. However, it’s possible to legitimately avoid these and benefit from a tax-free loan indefinitely. What’s involved?
Income v borrowing
It’s that time of year when cash can be tight. If you take extra income from your company you’ll have to pay more tax and perhaps NI too. As an alternative, you could borrow the money from your company. This arrangement avoids tax charges if carefully managed, but if it’s not, two taxes potentially come into play.
First tax charge
If your borrowing exceeds the de minimis threshold set by HMRC and you pay interest below its official rate (currently 2.25% simple per annum) or none at all, you’ll be taxed on a benefit in kind.
There’s no benefit in kind tax charge if the total amount you owe your company at any point in a tax year doesn’t exceed £10,000. This means you can borrow up to that amount indefinitely tax free.
Second tax charge
The second tax is a temporary charge equal to 33.75% of the borrowing and is payable by your company. It’s triggered where you borrow money which isn’t repaid within nine months following the end of the company’s accounting period (the nine-month rule). The tax is refundable nine months after the end of the accounting period in which the debt is cleared. In the meantime it can be a major dent in your company’s cash flow.
At one time you could dodge the nine-month rule by borrowing more money from your company and using it to repay the original debt. Anti-avoidance rules now apply so that if you repay the debt and within 30 days of that borrow from it again, HMRC ignores the repayment for determining if the 33.75% charge should apply.
Can you avoid the anti-avoidance rule?
It’s been suggested that one method of working around HMRC’s 30-day rule is to source short-term funding, e.g. a bank overdraft or loan from a family member, to repay the debt and then borrow from your company after the 30-day period and repay the overdraft etc. This might be feasible but the trouble is it falls foul of another trap.
The anti-avoidance rules also say that any temporary funding arranged or planned at the time you repay your company will cause the repayment to be ignored. However, this rule isn’t watertight.
Mismatched limits
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 method described above for a loan of up to that amount without the 33.75% tax applying.
It’s possible for you to borrow up to £10,000 interest free from your company for 21 months without any tax charges arising.
Follow the tip above then use temporary funding, say an overdraft, to repay the debt. After 30 days borrow again from your company and repay the temporary funding. This allows you an indefinite tax-free loan of up to £10,000.
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