Loan to director..

drunkmonkey

Struggling to get my head around this..

Let's say you take a 20k loan from the company at 0%, I understand if it's still outstanding at year end the company must pay income tax on the balance outstanding but that can be claimed back if the loan is repaid. Is that at the same rate as the director currently pays.
Also as it's at 0% I think the revenue want a few % , I read a figure of 13.5% interest. That seem excessive when you can get it cheaper from a bank.

Could anyone walk me through a 20k directors loan at 0%.

srsly78

Ask your accountant, there is so much wrong in this post. Companies don't pay income tax for starters. Revenue will assume a benefit in kind of several percent on the loan.

drunkmonkey

srsly78 wrote: »

Ask your accountant, there is so much wrong in this post. Companies don't pay income tax for starters. Revenue will assume a benefit in kind of several percent on the loan.

I read they have to pay income tax on the amount of the loan outstanding at year end. That bit makes sense. It's the true interest rate I'm struggling with.
Won't be with the Accountant for a week or so just trying to work this out now.

srsly78

Companies do not pay income tax at all, so you are starting from a flawed premise. Company director is a completely seperate legal entity from the company. Don't confuse which taxes apply to which entity.

Maybe what you mean is the company director has to pay tax on the benefit-in-kind they are getting from it being interest free? This is payable by the director not the company.

ACADasltiv

drunkmonkey wrote: »

Struggling to get my head around this..

Let's say you take a 20k loan from the company at 0%, I understand if it's still outstanding at year end the company must pay income tax on the balance outstanding but that can be claimed back if the loan is repaid. Is that at the same rate as the director currently pays.
Also as it's at 0% I think the revenue want a few % , I read a figure of 13.5% interest. That seem excessive when you can get it cheaper from a bank.

Could anyone walk me through a 20k directors loan at 0%.

There are two Revenue rates of interest:

4% if the loan is to buy your principal private residence and

13.5% for anything else

Benefit in kind will need to be paid on the shortfall between what the Company charges and what Revenue approves. So if the Company's giving you an interest free loan, you will pay benefit in kind on the full 13.5%. There's no way around this and it may make the loan cost roughly the same as a bank loan.

In relation to Corporation Tax, the Company will be required to deduct 20% income tax from the loan and pay it over to Revenue when filing its CT return. So you're correct in saying any amount outstanding when you're filing the CT return should be multiplied by 20/80 in order to get the amount payable to Revenue, which can be reclaimed as the loan is repaid. Also, if the Company charges interest on the loan, any income from it will be taxed at 25% as non-trading income.

You really need to speak to your accountant about the best way to handle the loan.

drunkmonkey

ACADasltiv wrote: »

Benefit in kind will need to be paid on the shortfall between what the Company charges and what Revenue approves. So if the Company's giving you an interest free loan, you will pay benefit in kind on the full 13.5%. There's no way around this and it may make the loan cost roughly the same as a bank loan.

Yes it's that bit i'm trying to figure out, as you said it looks like you have to pay an interest rate of 13.5% or charge the director 13.5% interest and pay no bik. Can't see any advantage to take a director loan as opposed to a bank loan besides being able to set your own payment terms.

Could you do something like this, borrow 20k, with 15 of the 20 due in a balloon payment in 5yrs and the other 5k paid paid back regularly over 5yrs?

ACADasltiv

drunkmonkey wrote: »

Yes it's that bit i'm trying to figure out, as you said it looks like you have to pay an interest rate of 13.5% or charge the director 13.5% interest and pay no bik. Can't see any advantage to take a director loan as opposed to a bank loan besides being able to set your own payment terms.

Pretty big benefit right there to be fair, able to stop and start repayments when you see fit with no penalties.

Could you do something like this, borrow 20k, with 15 of the 20 due in a balloon payment in 5yrs and the other 5k paid paid back regularly over 5yrs?

You could if you wanted, but income tax of 20% would still need to be paid over to Revenue on your behalf by the Company when filing the first CT return and that would remain with them on a pro-rata basis until the loan is repaid. You will also still be accruing interest on the entire loan for the five years, or BIK if you give yourself a rate less than 13.5%.

drunkmonkey

I'm also self employed besides being a salaried director so I should be able to offset the interest paid on the loan against my tax return as a sole trader bringing me back to 0% . It's a little complicated but should work I think.

nompere

srsly78 wrote: »

Companies do not pay income tax at all, so you are starting from a flawed premise. Company director is a completely seperate legal entity from the company. Don't confuse which taxes apply to which entity.

Maybe what you mean is the company director has to pay tax on the benefit-in-kind they are getting from it being interest free? This is payable by the director not the company.

Under Section 438 TCA 1997, close companies pay income tax at the standard rate on the grossed up equivalent of a loan made by the company to a participator (which mostly, though not always, incliudes directors). This is what the OP is talking about.

And yes, such a loan is usually within the BIK provisons applying to preferential loans.

TitianGerm

drunkmonkey wrote: »

I'm also self employed besides being a salaried director so I should be able to offset the interest paid on the loan against my tax return as a sole trader bringing me back to 0% . It's a little complicated but should work I think.

No if the loan is provided to you by the company for personal use, the BIK on the loan interest you pay in your Schedule E income won't be allowed as a deduction for your Schedule D income.

The company gives you a loan of €10,000 and charges no interest. The loan is for you to buy a car personally. You still owe the €10,000 at the year end.

You'll be taxed on the BIK as follows
€10,000 x (13.5% - 0%) = €1,350.

In your Income Tax return you'll have the following

Schedule D Income (Self Employed). X
Schedule E Income (Salary). X
Schedule E Income (BIK). X

drunkmonkey

The car is for use in the other business and it charges mileage to the LTD when needed so should be allowable as an expense.
The other option is just take out the money and pay the tax on it, then the tax paid should come off the sole trader tax bill.

dbran

I thing you need to talk to your accountant in fairness and get it properly straightened out. This is an online forum of very helpful folk but it is not a place for free advice.

Best regards

Dbran