Many Directors borrow money from their Limited Company, but there are 2 key costs:
- A Temporary Corporation Tax Charge of 25% – which can be reclaimed when the loan is repaid http://stevejbicknell.com/2012/01/02/pay-off-your-directors-loan-and-reclaim-corporation-tax/
- HMRC impose an interest rate of, currently, 4% on loans provided interest free. This is then a benefit in kind declarable on a form P11D each year. http://www.hmrc.gov.uk/paye/exb/a-z/l/loans.htm
- So, just an example, if you borrow £10,000 – Corporation Tax will be £2,500 and Benefit In Kind £215.20 (Interest £400, 40% tax and 13.8% NI)
If, your company, purchased assets and you used those assets privately, the treatment is much more favourable:
- The cost of the asset is allowed against Corporation Tax and you can claim Capital Allowances and the Annual Investment Allowance
From April 2012 the rates of capital allowances have been reduced from (a) 20% to 18% and from on the Main Rate Pool (b) 10% to 8% for ‘special rate’ expenditure respectively. At the same time the maximum amount of the Annual Investment Allowances (AIA) will be reduced to £25,000 a year (currently £100,000).
- The Benefit In Kind is generally 20% of the market value http://www.hmrc.gov.uk/paye/exb/a-z/a/assets-available.htm#2
- So, based on buying an asset for £10,000 – there will be saving in Corporation Tax of £2,000 and the Benefit In Kind Tax of £1,076, thats a net saving in year 1 of £924 compared to a cost in year 1 of £2715.20 on a loan (total difference £3,639.20), although the benefit in kind will be £860.80 more expensive in future years.
The Assets could be purchased from the Director but they must be transfered at Market Value.
According to Indicator ‘Tax Breaks for Directors’ assets owned by companies include antiques, paintings, furniture, business suits (but not vehicles) and the 20% benefit in kind amounts can be deducted from the value of the asset should it subsequently sold to an employee or director.
Generally you can only reclaim VAT on the purchase of Assets for Business Use http://www.hmrc.gov.uk/vat/managing/reclaiming/private-use.htm
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