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Where Taxpayers and Advisers Meet

Directors Loan without any money

awkwardturtle
Posts: 2
Joined: Sat Feb 11, 2017 7:43 pm

Directors Loan without any money

Postby awkwardturtle » Sat Feb 11, 2017 8:11 pm

Hi everyone I have a couple of questions about directors loans,

1) If I setup a limited company to buy a property from myself which I own (no mortgage) can I wholly fund the purchase using a directors loan, even if no physical money is transferred? Is it just a case of creating a negative number (the loan debt) on the ltd company accounts? I thought only banks were allowed to create money out of thin air :lol:

Also, am I right in thinking that;

2) there is no time limit on directors loans from the director to the company?
3) any interest payable is at the directors discretion and can vary whenever? (taxable @ personal rate)
4) capital repayments of the loan from taxed corporate profits would be free from any personal taxation

Thanks!

AmanSood
Posts: 215
Joined: Mon Jan 09, 2017 4:12 pm

Re: Directors Loan without any money

Postby AmanSood » Mon Feb 13, 2017 9:27 am

1) If I setup a limited company to buy a property from myself which I own (no mortgage) can I wholly fund the purchase using a directors loan, even if no physical money is transferred? Is it just a case of creating a negative number (the loan debt) on the ltd company accounts? I thought only banks were allowed to create money out of thin air

That's right you don't need to physically transfer any money. Instead you can create a loan account.

Also, am I right in thinking that;

2) there is no time limit on directors loans from the director to the company? Yes
3) any interest payable is at the directors discretion and can vary whenever? (taxable @ personal rate) Yes but if interest is payable has to be on an arms length basis as otherwise potential risk of being viewed as earnings and taxable as employment income.
4) capital repayments of the loan from taxed corporate profits would be free from any personal taxation Yes

Other consideration - disposal of the property to your Ltd company may give rise to a UK Capital Gains Tax/Stamp Duty etc.
Advising on UK employment, expatriate and personal taxes
aman.sood@e-taxconsulting.com.
+44 (0) 207 846 0155

bd6759
Posts: 3109
Joined: Sat Feb 01, 2014 3:26 pm

Re: Directors Loan without any money

Postby bd6759 » Mon Feb 13, 2017 5:25 pm

I thought only banks were allowed to create money out of thin air
You are not creating money out of thin air. You are selling an asset, and allowing the purchaser a lengthy period of time to pay you. You are echanging the asset for another asset: a debt.

Ian McTernan CTA
Posts: 1232
Joined: Wed Aug 06, 2008 3:02 pm
Location: Bedford
Contact:

Re: Directors Loan without any money

Postby Ian McTernan CTA » Tue Feb 14, 2017 1:37 am

Your problem is capital gains tax and stamp duty.

For CGT you are disposing of the property at market value.

For Stamp Duty the company is purchasing the property for market value and the 3% additional charge may also be in point, based on the value transferred. You'd need a Stamp Duty expert or solicitor to confirm this- I tend to steer clear of Stamp Duty as it is often not straightforward!

Your problem will be having no money to pay the CGT.

You will have exchanged your property for a debt owed to you by your company. You will also need to loan the company actual money for it to pay stamp duty, solicitors fees etc.

The company will have in it's accounts the property at market value and against that is the debt owed to you, so the company's net balance sheet will be negative after payment of the stamp duty and fees associated with the purchase.

You will then have the running costs of the company every year...

There isn't really any good reason given why you would want to do this.
McTernan Associates Ltd
Chartered Tax Advisers
Bedford
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SteLacca
Posts: 447
Joined: Fri Aug 07, 2015 2:17 pm

Re: Directors Loan without any money

Postby SteLacca » Tue Feb 14, 2017 5:19 pm

You haven't indicated whether the property is residential or commercial, and what use the property has. Both a pertinent to treatment for both SDLT and CGT purposes, and possible reliefs that may be available. Ian's response tends to assume UK residential, but it would be nice to have confirmation.

awkwardturtle
Posts: 2
Joined: Sat Feb 11, 2017 7:43 pm

Re: Directors Loan without any money

Postby awkwardturtle » Thu Feb 16, 2017 8:03 pm

Ian's response tends to assume UK residential, but it would be nice to have confirmation
Yes, it's residential
For CGT you are disposing of the property at market value.
CGT is not a problem, it hasn't risen in value, it is on the market and there is currently no appetite to buy it at the same price as it was bought 8 years ago (hence the exploration of other options)
the 3% additional charge may also be in point
I have looked into this and yes it would. As I understand it the 3% is charged on all purchases through ltd companys (for transactions above 40K)
Your problem will be having no money to pay the CGT.
I would have thought the CGT would be a personal liability, rather than the company's (albeit zero given the lack of appreciation)
You will then have the running costs of the company every year
Yes this is a big downside which is decimating the operating profit in my cost analysis, I'm investigating the feasibility of doing the spade work myself, perhaps with the help of a professional for the first year. You're absolutely right though, this is one of the most unattractive parts of this approach.
There isn't really any good reason given why you would want to do this.
The main reason is to reduce the SDLT liability on another purchase which would be circa 3 times bigger than paying the 3% on the current property
There is also the efficiency of rental profits being taxed at corporation tax levels vs higher rate personal tax (I appreciate these profits would still have to be realised, but capital could be built up in the short term by repaying the loan)

Overall I tend to agree that it's a lot of hassle, but I'm exploring the options and I was interested to know how director's loans worked in practice, thanks to everyone for the responses so far.

Incredulum
Posts: 2723
Joined: Thu Dec 03, 2009 5:35 pm

Re: Directors Loan without any money

Postby Incredulum » Fri Feb 17, 2017 5:16 pm

The company will have in it's accounts the property at market value and against that is the debt owed to you, so the company's net balance sheet will be negative after payment of the stamp duty and fees associated with the purchase.
Not sure I agree with this. Normal practice would be to capitalise the SDLT and associated fees into the property. (Doesn't help the other points, of course.)


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