The question of tax relief comes up so much there is always an angle to cover. This time I am going to look at the tax relief available for those that borrow money specifically to introduce to a company.
In the main people have borrowed money to lend to a limited company but it is possible that the money was used to purchase the shares in the company. I will be looking at the “lend to” position here as that is far more common.
There are many ways people fund property purchases and companies that invest in property have just as many, if not more, ways of getting money in to property.
It is quite common for someone to borrow money personally and then introduce the money to the company. So long as you are a qualifying person (normally a director and one of less than 5 shareholders – not that simple but just for here) you can get tax relief personally for the loan interest you pay. On the face of it this seems like a great wheeze but don’t forget that you have to pay the interest.
If the company gives you the money to pay the interest that needs to be considered. If you are drawing down against a director loan then the extraction of the monies will not be taxable. If you are drawing a salary then it will be taxable. Tax on the salary will match the tax relief you claim leaving you tax neutral.
If you draw dividends from the company then they could be taxed at a slightly lower rate than the tax relief you obtain on the loan interest but don’t forget of course that the profits would have already been taxed in the company meaning the overall tax charge will be higher.
Finally if the company pays you interest on the money it borrowed from you then again that will be taxed in your own hands leaving you tax neutral overall. Don’t forget however that the company will likely need to deduct 20% tax from the interest it pays to you meaning you will be at a cashflow disadvantage until the taxes wash through your tax return.
For most of the above reasons most people tend to prefer to simply borrow the money within the company – that said I appreciate that isn’t always what happens.