Subsidised Loans From Your Company

If you need to take short-term money out of your company, instead of taking a dividend or a salary, a subsidised loan could be the answer, and the good news is that the interest rate on such loans is currently frozen.

With a subsidised business loan, the income tax you pay is based on the difference between the ‘official rate’ of interest, which is presently 5%, and the interest rate actually charged. This 5% is frozen for the 2004/05-tax year, unless significant changes from The Inland Revenue occur in the meantime. Therefore this means that a short-term loan from your company could work out to be considerably cheaper than from elsewhere.

The only problem here is that if, 9 months after the company’s year-end, there is a balance on the loan, the company will have to pay over 25% of this to the taxman. However this can be avoided by taking out a loan in excess of £5,000 and for you to be charged no interest on the balance. Notional interest of 5% would then be calculated by the taxman on the outstanding balance during the tax year. This is classed as a benefit in kind and is taxed at your highest rate of tax.

You should therefore take out the loan on the first day of your accounting period, not just on the first day of the tax year (unless the dates coincide). This then gives you 21 months to leave the loan outstanding.

You can use this method to provide funds if you need a bridging loan. For example a £50,000 bridging loan for six months would cost you £500 in tax. This works out considerably cheaper than a bridging loan would from a bank.

Eg. £50,000 x 5% = £2,500 x 6/12 x 40%

This method of raising low cost funds can then be used to pay off higher outstanding loans, saving you considerable interest. You must however, pay the money back in the end!

If you put the borrowed funds into a deposit account, which is linked to your mortgage or other borrowings, you can reduce the interest bill and still have funds to repay the loan.

You must ensure that the loan balance is repaid by a couple of days before the 9-month deadline.

If you should find that the loan balance rises over £5,000 at any time during the tax year, this tax exemption will not apply and you will have to pay full tax on the benefit in kind, so it is worth trying to keep it below £5,000.