Setting up multiple companies to separate business interests can seem very straight forward. There are however important considerations. We explore the implications of owning too many companies.
Borrowing personally to invest in your own company – Beware the interest trap!
28 December 2023
Building a Business, Property Investors & Developers, Raising Finance, Structuring a Business
With interest rates hitting new highs many business owners may start falling foul of a little known rule in respect of interest relief on personal loans to invest in companies.
This is particularly relevant to property development companies where to raise finance many business owners have taken out personal loans secured on their properties to invest in their companies as the easiest way to raise finance.
In the last few years with low interest rates in most circumstances this hasn’t been a problem.
Personal Investment Tax Treatment
The UK tax treatment of interest on personal loans, especially when these loans are used for investing in limited companies, has specific rules and provisions.
One of the most discussed topics in this regard is the £50,000 interest deduction limit.
Let’s delve into this aspect in more detail.
Interest on Personal Loans for Investing in Limited Companies
When an individual borrows money personally and then uses it to invest in a limited company, either by purchasing shares or by lending the money to the company, the interest paid on that loan can be tax-deductible.
This means that you may deduct the interest cost from your taxable income, thus reducing the amount of tax you have to pay.
The £50,000 Interest Deduction Limit
However, it’s crucial to be aware that there is a limit on the amount of interest that you can deduct.
The specific limit is £50,000 or 25% of the individual’s adjusted total income, whichever is higher.
Sounds like a lot and for most it will be but with interest rates at 8% or more this means that many loans will be impacted.
Adjusted total income is your total taxable income (after losses and pension contributions) but before the personal allowance and blind person’s allowance.
This means that if the interest on your personal loan surpasses £50,000 in a tax year, you can only deduct up to this amount unless 25% of your adjusted total income is higher than £50,000.
Example
A loan of £700,000 at 8% will have interest payable of £56,000 but the amount tax relievable will potentially be limited to just £50,000.
Exceptions and Special Cases
There can be certain scenarios where specific exceptions or different tax treatments may apply:
- Directors’ Loans: If you are a director of the company you’re investing in, the nature of your loan might be treated differently. It’s essential to ensure the loan qualifies for relief, and the company uses the loaned funds for its business operations.
- Multiple Investments: If you have invested in multiple limited companies using personal loans, it’s crucial to keep a detailed record of the interest on each loan to accurately calculate and claim the deductions.
Planning is Key
If you’re considering using a personal loan to invest in a limited company, or if you’ve already done so, it’s crucial to understand the tax implications.
While the £50,000 limit on interest deduction is an essential aspect, many other considerations should be taken into account.
Advice based on your circumstances
It’s always advisable to consult with a tax professional or financial advisor familiar with UK tax rules to ensure you’re maximising benefits and complying with all regulations.
Remember, while tax advantages are a welcome bonus, they should not be the primary reason for making a personal investment.
Ensure that your investment decisions align with your financial goals and risk tolerance.
Also with interest rates getting higher it may be more advisable to look for direct corporate funding rather than via personal loans.
It might actually work out cheaper if the amount of interest relief lost as an individual borrower is significant.
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Navigating Property Development Finance: A Guide to Raising Funds for Your Project
The content in this blog is correct as at 28th December 2023. See terms and conditions.
