Cheap Mortgage from Your Company?

HMRC has delivered an unexpected yet advantageous update for shareholders.

With the official rate of interest (ORI) for employee loans remaining remarkably low, there’s a unique window for savvy financial planning.?

Discover how leveraging company funds can significantly reduce your personal mortgage costs.

Take Advantage of Low Interest Rates

HMRC caught many by surprise: the official rate of interest (ORI) for employee loans will stay at just 2.25% for the 2024/2025 tax year.

This rate is significantly lowered than the previous 5.25% base interest rates, and far below HMRC's late tax payment rate of 7.75%.

This unusual disparity presents a unique opportunity for shareholders, especially when considering using company funds to refinance personal mortgages.

Key Rules on Director’s Loans

When a shareholder borrows money from their company, certain tax rules apply.

For instance, interest-free loans exceeding ï¿¡10,000 at any point during the tax year will incur a tax charge based on the ORI.

For example, borrowing ï¿¡100,000 from the company would result in a tax on a benefit of ï¿¡2,250, equating to ï¿¡1,012 in taxes at a 45% rate.

Additionally, Section 455 imposes a 33.75% corporation tax charge on loans outstanding nine months after the company’s year-end, which is repayable nine months after the loan is settled or written off.

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Example Scenario: Refinancing a Personal Mortgage

Consider Michael, whose ï¿¡400,000 mortgage renewal is approaching.

His current interest-only deal at 1.8% is set to rise to 4.7%.

Instead of accepting this higher rate, Michael could borrow ï¿¡400,000 from his company.

At a 45% tax rate, this would cost him ï¿¡4,050 in taxes on the beneficial loan, plus about ï¿¡621 in employer's national insurance contributions, totalling approximately ï¿¡4,500 annually.

This is substantially lower than the ï¿¡18,800 annual cost under the 4.7% mortgage rate.

Although Michael’s company might face a ￡135,000 Section 455 charge if the loan isn’t repaid by December 2025, Michael plans to repay it once mortgage rates stabilise, enjoying a period of cheap finance in the meantime.

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Benefits and Considerations for Shareholders

Using director’s loans to finance short to medium-term needs has never been more advantageous.

Even with potential returns forgone by the company (e.g., a 4% bank return translating to about ï¿¡7,000 once extracted by Fred), the savings remain significant.

This low ORI is particularly beneficial for shareholders preparing for a sale, as they can opt for ‘cheap loans’ over dividends, potentially paying lower capital gains tax instead of income tax when the company is sold.

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Summary

Director’s loans offer a cost-effective way for shareholders to meet financial needs while leveraging favourable tax conditions.

With the ORI at a historic low, now is an opportune time to consider this strategy.

The benefits are clear: substantial savings compared to traditional financing options and strategic tax advantages when planning for future company sales.

At Tax Expert, we specialise in helping shareholders make the most of unique financial opportunities like this, through extensive experience working with other shareholders.

Don’t miss out on the chance to refinance personal debts at historically low rates or prepare for a lucrative company sale with expert guidance.

Get in touch with me to transform your financial future and secure the best possible outcome for your finances.