Can Limited Company money be used to offset a personal mortgage?
Contractors who set up as Limited Companies can end up with large sums of cash in their company bank accounts sitting there in readiness to pay tax liabilities. These deposits don’t earn much interest, so contractors often look at ways to get this money working for them. One option often asked about is whether their company funds can be used to offset their personal mortgages.
Banks don’t allow the use of money coming directly from a Limited Company account to offset a personal mortgage. You can only do this by moving funds into your personal account. This is because the money belongs to the company – not you personally – until you take it out of the business as a dividend, loan or salary.
If you are working outside IR35 rules you have two options to transfer funds to you personally:
- Take a Director’s loan
- Pay yourself early dividends
Your company can give you a loan of only up to £5,000 tax free and without being deemed a benefit in kind. Loans over £5,000 will be subject to benefit in kind implications, based on the HMRC approved interest rate and this will be calculated when your P11d is prepared. In addition, if you do not repay the loan within 9 months of your company’s year end you will be liable to HMRC for 25% of the total loan amount. The S455 charge will be repaid once the loan has been repaid in full back to the Limited Company. All loans must also be minuted and have full documentation in your company’s records. It’s possible to repay a loan and then take out another a few days later but this is not advisable. This activity will attract HMRC attention and they are likely to argue that this is effectively a continuous loan and apply the tax and interest payments you were looking to avoid.
Paying yourself early dividends
This amounts to paying dividends using the money you have set by for tax, with the intention of earning the tax amount later from future expected income. Sounds like a great idea, but dividends can only be paid from available profits. If the profits are not available and excess dividends have been paid, these will be deemed as a director loan from the business.
The options available raise issues which could incur a nasty sized tax bill or, in some cases, prosecution under the Companies Act 2006. For this reason using company money to offset a personal mortgage is not recommended.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.