Interest costs continue to increase. Anything you can do to soften the blow by tax planning?
First, can you get tax relief?
If you are a sole trader or a partner, what about borrowing through the business in order to release capital for repayment of non-business loans? Provided you don’t end up with an overdrawn capital account, this should give you tax relief at your highest personal tax rate.
A similar principle applies with investment property: additional borrowing to release equity should generate tax relief. Two caveats though.
The first is that interest on debt is tax-deductible only up to the amount of the original purchase price (or the value when the property was appropriated to your lettings business) plus capital improvements: borrowing to release equity arising from subsequent revaluation is not tax-efficient.
The second is that, for residential property, relief is limited to the basic rate of tax: if you want full relief consider incorporating the property investment business, though that is a multi-factorial decision not to be undertaken lightly.
What if you are trading through a company? Can you borrow from the company to fund repayment of third-party private indebtedness? Again, two things to bear in mind.
The first is that if you are an employee or director of the company (or a relative of yours is) there will be a ‘benefit in kind’ charge on an amount equal to notional interest at the ‘official rate’ on the loan. The rate for a tax year is set before the start of the year and HMRC’s policy has been to eschew mid-year increases. That makes the 2023/24 rate of 2.25% something of a bargain.
The second is that if you are a ‘participator’ in the company (broadly, shareholder; but the term is somewhat wider), the company must deposit with HMRC an amount equal to 33.75% of the amount loaned (which is released back to the company in the same proportion as the loan is repaid, albeit with a delay of at least nine months). The same thing applies if you are not yourself a participator but an ‘associate’ of yours (a term which includes relatives but is much wider) is.
Interestingly, in neither case does an Unmarried Cohabiting Partner count (‘UCP’) as a ‘relative’ or ‘associate’, which may offer opportunities in appropriate cases. Don’t over-egg the pudding though: routing money from your company to yourself via your UCP is likely to fall foul of anti-avoidance rules.
Finally, if you are contemplating assisting others (your children, for example) by loans or guarantees, there is good news and bad.
The good news is that although giving money to your children to help them pay their mortgage is a potentially exempt transfer, lending money interest-free isn’t, provided the loan is repayable on demand.
Less good is that if at some future date you decide to write off the loan and convert it to a gift, there are some hoops to jump through, on which we commented recently. And if, having jumped through those hoops and made an effective gift, you subsequently find yourself borrowing the money back, that can cause inheritance tax complications too as we noted in this briefing a year or two back.
For more information, and to discuss tax-efficient planning for your situation, please get in touch with your usual BKL contact or use our enquiry form.
At our webinar on 26 July, Anthony Newgrosh and Helena Kanczula will be exploring corporate tax issues amid rising interest rates. Find out more here or register below.