Making a loan to your company
When you are making a loan to your company or buying shares in a company it's possible to obtain tax relief on any loan interest paid for this purpose. This post discusses the qualifying conditions required to secure this relief.
Overview
When lending money to your company, understanding the conditions for the relief is crucial. Therefore, any loan made must be used in specific ways to qualify for the tax relief and these are covered below.
Qualifying loans
Tax relief is available if the loan is used to acquire ordinary share capital of a close company However, it cannot be Close Investment Holding Company. Alternatively, the loan can be used for lending money to such a company for:
What is a close company?
A company is 'close' if it is owned and controlled by five or fewer individual participators or shareholders. The majority of small private companies and many family companies fall within this definition.
You can also claim loan interest relief for investing in EEA resident companies. Although, this only if they would qualify as a close companies if UK based.
There is no tax relief available where a share acquisition qualifies for Enterprise Investment Scheme Relief.
Qualifying conditions for the relief
The qualifying conditions for tax relief on a loan to your company are set out below.
Capital recovery
A restriction applies where, after making a loan to your company you recover any capital which is used to repay your own borrowings. As a result, any loan interest relief is restricted to the extent capital is received.
The loan interest relief is treated as repaid to the extent capital is received. This includes, selling or gifting shares, repaying share capital and repaying a loan made to the company.
So relief is restricted regardless of how the recovered money is used.
An example
On 6 April 2024, loans £50,000 to Southgate Ltd a close company. Ollie finances this via a personal bank loan. On 30 September 2024, Southgate Ltd repaid £35,000. Relief for interest on the full £50,000 is given from 6 April to 30 September 2024. Relief for interest on £15,000 of the bank loan is given from 30 September 2024. This is regardless of how the repayment is used.
Full-time working condition
When the interest is paid you must hold ordinary shares in the company. Additionally, you must hold the shares when any interest is paid on the third party loan.
Additionally, you must spend the majority of your time in actual management or conduct of the company or an associated company during the loan period.
Material interest
You have a material interest in the company. A material interest is defined as owning or controlling more than 5% of ordinary shares in the company. Alternatively, you own rights entitling you to more than 5% of the company's assets on winding up.
If your company holds investments or other property, either the full-time working conditions must be met or no company property is used as a residence.
Other points
Your loan may not qualify for loan interest relief if your company is engaged only in investment activities. However, property letting is treated as a business activity for Corporation Tax purposes so qualifies for relief.
When making a loan to your company and agreeing the interest payments to you, your company must withhold 20% Income Tax. What's more income tax should be withheld even if interest is credited to your director's loan account. Additionally, your company must account for this income tax quarterly to HMRC.
Equally importantly, failing to document an agreement to pay interest, or withholding income tax, will cause issues. This is because HMRC can challenge these payments as earnings subject to PAYE. Therefore, ensure all board decisions are recorded in writing,
Summary
Understanding the qualifying conditions will ensure you obtain tax relief when making a loan to your company. Additionally, you must keep detailed records and stay compliant with HMRC regulations.
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.