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Tax Questions: Is Lending to Your Company Tax Efficient?

Lending to Your Company - Tax Questions

At LHP we sometimes get asked, if I had some money sitting earning almost zero interest, could I lend some of it to my own company and charge it a higher interest rate to generate more income to be tax efficient? The answer is yes sometimes, but there are rules and exceptions to consider.

The rules

Company law includes strict rules which dictates when a company is allowed to lend money to a shareholder but there are no equivalent rules relating to directors and shareholders lending to their companies. The question of whether lending to your company and charging it interest is tax efficient is trickier to answer.

If you charge your company interest on money you lend, it’s taxable income for you. The arrangement will only be tax efficient if you can claim a corresponding tax deduction. The measure of tax efficiency will depend on rate of corporation tax your company pays (19% now, rising to 25% in April 2023) and the rate of income tax you’ll pay.

Genuine business need

Corporation tax rules differentiate between interest paid by a company for trading purposes and that paid for other reasons. Broadly rules state interest incurred wholly and exclusively for the purpose of a company’s business is tax deductible like any other expense, while deductions for ‘other interests’ are subject to more restrictive rules under the loan relationship regime.

In other words, if you lent your company money to buy new machinery needed for necessary business operations, that would be a trading expense. On the other hand, if you lent it money when it didn’t have any real need for it, the interest would be a loan relationship deficit.

At one time this might have deferred or prevented tax relief for your company. However, since April 2017 corporation tax rules were relaxed so that relief for loan relationship deficits can be deducted from a company’s business profits for the current and future accounting periods (and those of the previous twelve months).

Commercially competitive rate

If you charge interest at a rate that’s higher than your company would pay if it borrowed money from a bank, HMRC could argue it’s not entitled to tax relief due to the excessive interest.

So yes, you can lend to your company and charge it interest but be commercially competitive on rate in order to claim tax relief for this. You’ll be taxed on the interest you receive but taking account of corporation tax relief your company can get, extracting income from your company this way should be more efficient than through dividends.

Let’s Talk

For help calculating loans to your own company in a tax efficient way, get in touch we can help. Let’s Talk.

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