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I have read several threads on the pros and cons of paying a director's wage and taking dividends.
What are the pros and cons of charging interest on the director's loan, i.e. the money invested into the company by the director?
I spoke to my adviser about this and you can charge interest ??
But it would be taxable I think
of course you could have I think £1000 a year tax free
I am not sure how you work out the rate of Interest so I would like others thoughts on this
Learn Change and Adapt ?????
Would obviously check with your own, but my accountant told me £1,000 per year tax-free if you’re a basic-rate tax payer, but only £500 per year tax-free if you’re a higher-rate taxpayer.
that sounds about right
I know Looked at it but I think the company has to take the tax off first just like a bank
I thought it was not worth doing
You can charge interest on a director's loan, it is paid from the company to the director before corp. tax.
It should be at a commercial rate, you should speak to your accountant about what rate would be sensible.
The director will pay income tax on the interest, just like you do from your saving at the bank etc.
If you are a BR tax payer then in total you can earn £1,000 of interest tax free, if a HR tax payer £500 tax free. These figures should include any bank, building society etc. interest.
It seems that for those of us on lower incomes this could be very useful as it increases the income tax allowance quite significantly. I hadn't even considered these as options. The total allowances appear to be in addition to dividend income and don't include other exemptions such as the RAR allowance.
Personal Savings Allowance £17,500 pa tax free:
The bigger question is why are you thinking of incorporating your BTL portfolio in the first place?
Less Tax For Landlords
There are 2 terms that I am very conscious of - disposal of assets and deprivation of assets.
I currently have assets in a bare trust which is coming to an end. In my unqualified opinion, incorporation provides a similar degree of separation and offers more flexibility than a trust.
Taxation is a secondary concern, but it appears quite favourable in my position - low income, small residential mortgage, unencumbered rental property, nearing retirement, small private pension.
I can't really answer without knowing the full details.
Meanwhile, this may help: -
A bare trust (sometimes known as a ‘simple trust’) is one where the beneficiary, the person who benefits from the trust, has an immediate and absolute right to both the trust capital and the income received by the trust from that capital.
Someone who sets up a bare trust can be certain that the assets they set aside will go directly to the beneficiaries they intend, because, once the trust has been set up, the beneficiaries cannot be changed.
The trust assets are held in the name of a trustee (the person administering the trust), but the trustee has no discretion over what income or capital to pass on to the beneficiary or beneficiaries.
Bare trusts are commonly used to transfer assets to minors. Trustees hold the assets on trust until the beneficiary is 18 in England and Wales. At this point, beneficiaries can demand that the trustees transfer the trust fund to them.
ExampleGary leaves his sister Juliet some money in his Will. The money is to be held in trust. Juliet is the beneficiary and is entitled to the money and any income (such as interest) it earns. She also has a right to take possession of any of the money at any time.
This is a bare trust because Juliet is absolutely entitled to both the capital (the original money put into the trust) and the income (any interest earned).
Bare trusts and Income Tax
The assets of a bare trust are treated for tax purposes as if the beneficiary holds the trust property in their own name and the beneficiary is liable to Income Tax on income received.
The beneficiaries of a bare trust need to account for any Income Tax or Capital Gains Tax on their Self Assessment tax return. They do this on the sections of the form SA100 that deal with income, not the SA107 Trusts etc supplementary pages.
Although trustees can pay Income Tax on behalf of a beneficiary, it is still the beneficiary who is liable for the tax.
Capital Gains Tax on a bare trust
Capital Gains Tax is a tax payable on ‘gains’ (profits) above a certain level made from the sale of assets such as shares, property or possessions. It is charged on any gains greater than the ‘annual exempt amount’, which is set each year.
In a bare trust, Capital Gains Tax is charged on the beneficiary, as if the trust did not exist.
The beneficiary must declare any chargeable gains on their personal Self Assessment tax return.
Inheritance Tax on a bare trust
For Inheritance Tax purposes, assets placed in a bare trust are treated as ‘potentially exempt transfers’. This means that they are usually only subject to Inheritance Tax if the settlor who put the assets into the trust dies within seven years of doing so.
In this case, since the capital and income of a bare trust belong absolutely to the beneficiary, the beneficiary is responsible for any Inheritance Tax that may be due.
Thanks for the info Tony, I am aware. Fortunately the trustees have appointed an accountant to deal with this on my behalf.
I don't wish to sound ungrateful, but an opinion from you on my original question regarding the pros and cons of charging interest on a director's loan would have been more valuable.
Sorry Gary, but I can't give you a definitive answer without first knowing the entirety your circumstances. Not being awkward, but giving isolated advice puts us both at risk. Happy to talk though.