# Borrowing money from Ltd company to build house



## k06351000 (3 Dec 2020)

First apologies if this is in the wrong section, so I need €300,000 to build a new house,

I am 25% shareholder in a family business which would have cash which it could lend me.

Basicslly my question Is there a minimum amount of interest that the company needs to charge me? I believe charging zero interest isn’t an option..

I was thinking .25% over a 20 year term which would save me money on a mortgage but also be more than the company would earn if the money was in a deposit account.


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## RedOnion (3 Dec 2020)

It's a murky area, and one you need proper advice from an accountant that's familiar with company law.

There are 2 aspects you need to look into:
Company law, and Tax

Re company law, even if you're not a director I'm assuming you're connected to a director. There were additional measures in the Companies Act 2014 to tighten up this area. The amount being borrowed would need to be less than 10% of the assets of the company. Lots of other things the company would need to do to keep above board.

On the tax side, it's a preferential loan. So you'd pay benefit in kind tax based on the notional rate of interest. For a qualifying home loan, you'd pay tax based in the discount you get from a specified rate, currently 4% per annum. 
So, if you borrow 300k, and pay 0.25% interest, you'd pay income tax on 11,250 BIK.


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## Fidgety (3 Dec 2020)

In addition to the complexity, there’s the opportunity cost of the capital returning a higher rate of return invested in the business, the consent of other shareholders and the terms in the event of repayment/default.

Professional advice is probably sensible.


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## k06351000 (4 Dec 2020)

Thanks for the replies guys first things to say is that we would definitely be getting tax advice from the companies accountants, would just like to have some idea of what is possible and sensible before approaching them.

Yes, I am a director of the company.
_
 The amount being borrowed would need to be less than 10% of the assets of the company. Lots of other things the company would need to do to keep above board_

Total assets of the company would be about 2,000,000 - does this rule out the idea completely? Is the 10% rule because I am a director/shareholder or is it a general rule? 

_So you'd pay benefit in kind tax based on the notional rate of interest. For a qualifying home loan, you'd pay tax based in the discount you get from a specified rate, currently 4% per annum_

ok thanks,, looks like it wouldn’t make much sense in that, case.

AlternatIvey my father would gift me the money as a personal loan... do similar restrictions apply here? I think I read somewhere that the interest rate is linked to current deposit rates which should mean .25% would be ok.


Thanks again some great info on here


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## Gordon Gekko (4 Dec 2020)

No, the 4% deemed BIK rate is a great rate because the cost to you is the tax on 4% which is approximately 2%.

But you’re correct, your Dad can lend you money with a deemed gift of circa 0-0.25% per annum arising.

This is more than covered by the €3k per year Small Gift Exemption.

Parents tends not to actually charge interest as that’s then taxable for them.

More often than not, the parent uses the Small Gift Exemption to write-off the loan over time. But the ‘child’ can of course just pay it back.


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## RedOnion (4 Dec 2020)

k06351000 said:


> Total assets of the company would be about 2,000,000 - does this rule out the idea completely? Is the 10% rule because I am a director/shareholder or is it a general rule


Yes, my understanding is it would be a breech of company law for them to lend you over 10%, but others better versed in this area might clarify.
It's a limit to directors, or any person connected to directors. It's basically to stop the exact scenario you've raised, where directors could make use of company funds without paying tax.

As @Gordon Gekko  says, your parents giving you an interest free loan might be cleaner.


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## Brendan Burgess (4 Dec 2020)

Hi k

You really do not want the complications of a loan from a company to an individual who is a director and shareholder.  It's easy to do it wrong and break the company law and tax law. 

Why has the company built up cash? That is the more fundamental question. You should make sure that it has a strategy for not building up useless cash balances which are inefficient for tax purposes. It might have been better to pay that cash out as salary instead of accumulating it and seeing it stuck in the company. 

So it might make sense now to address this problem and pay the cash out and take the hit. 

Brendan


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## Gordon Gekko (4 Dec 2020)

Yes, why aren’t the owners/directors aggressively funding their pensions?

Perhaps they are?


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## Jim Stafford (4 Dec 2020)

We have a blog on the link below which summarises the issues arising on loans to directors.





__





						Issues to consider when dealing with corporate loans to directors
					

When a director borrows money from their company for personal use there are a number of legal and tax issues to be considered. Directors’ loans and the Companies Act 2014 The Companies Act 2014 prohibits directors or connected parties to them been given loans greater than 10% of the company’s...




					www.frielstafford.ie
				





Jim Stafford


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## k06351000 (4 Dec 2020)

Thanks for all the replies, very interesting. 

The money in the company is definitely an issue and I will make a post asking for advice on this at some stage.

Looks like borrowing from the company won’t be ideal but will see if the accountants can come up with a workable solution.


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## Pinoy adventure (4 Dec 2020)

Brendan Burgess said:


> Hi k
> 
> You really do not want the complications of a loan from a company to an individual who is a director and shareholder.  It's easy to do it wrong and break the company law and tax law.
> 
> ...



Brendan,regarding your question why has the company built up cash ? 
Surely a company would need some cash build up ? Rather than paying salarys with it.
Wouldn't a cash loaded company be more secure than a company with a modest cash balance  or would turn
Over come into it ?


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## Brendan Burgess (4 Dec 2020)

Hi Pinoy

Some companies need cash.

But when the question is of the type "How can the company lend me cash it does not need?" , it indicates that it has accumulated cash it does not need without any plan. 

And lots of companies do this.

Brendan


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## Gordon Gekko (5 Dec 2020)

Brendan Burgess said:


> Hi Pinoy
> 
> Some companies need cash.
> 
> ...



There’s also the point that excess cash contaminates a company from the perspective of claiming things like Business Property Relief


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## Brendan Burgess (5 Dec 2020)

A few other reasons for not keeping excess cash or assets in a company...

1) If you want to admit a new shareholder into the business, you are giving them a share of the excess cash as well as the normal business assets.
2) If you sell the company, the buyer has to buy the excess cash. 

It's generally not a good idea unless it's part of a tax plan to avail of Entrepreneurial Relief or Retirement Relief in the short-term.

Brendan


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## Pinoy adventure (5 Dec 2020)

Brendan Burgess said:


> A few other reasons for not keeping excess cash or assets in a company...
> 
> 1) If you want to admit a new shareholder into the business, you are giving them a share of the excess cash as well as the normal business assets.
> 2) If you sell the company, the buyer has to buy the excess cash.
> ...



Hmm
#2 wouldn't the current director or shareholder/s remove the cash befour the sale ? If not why ? 
Would excess cash be profit/income into the business better banked rather than split between the shareholders ?


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## Brendan Burgess (5 Dec 2020)

Pinoy adventure said:


> #2 wouldn't the current director or shareholder/s remove the cash befour the sale ? If not why ?



Hi Pinoy

Yes, they probably would have to and it would be terribly tax inefficient. So it's better  not to accumulate excess cash in the first place. 

The purpose of a company is to generate income for its shareholders, so it's better in their hands than in the company's hands.  

Of course, if the company has a plan for acquisition or investment, then it might well build up cash reserves. 

Brendan


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## DB74 (7 Dec 2020)

My understanding is that the 10% rule applies to Net Assets and not Assets, a very important distinction


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## k06351000 (16 Dec 2020)

Hi guys, thanks for all the advice here.
Having talked about this with family members involved in the business (but not the accountants yet) 
, I would love to ask some follow up questions.

Firstly the net assets of the company are around 2.5 million, so that means 10% would be 250,000 which should be more than enough at this moment. (A gift and negotiations with the builder have brought the amount needed down)

If a sibling also wanted to take a loan from the company in the near future would that be permitted? I.e. can we each borrow up to 10% or is it capped at a total 10% loan to directors. 
Presume it wouldn’t be allowed but someone here might be able to confirm

So the general feeling that was that the fairest and simplest solution would be for the company to loan me the money at 4%.

This means that my monthly payments would increase quite a bit but there would be no BIK consideration.

Then the company would pay tax on the loan interest at 25%.

What other implications would there be for the company? I think there would be other taxes or surcharges  due but can’t fully understand what they would be.

Loan would be ~220,000 at 4% over 15-20 years.



An alternative solution proposed was taking the cash as a dividend- it would then be taxed at my marginal rate I presume.


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## Jim Stafford (17 Dec 2020)

The 10% cap applies to all Directors' loans.
Unless you have your own class of shares, the company would have to pay the same dividend pro-rata to other shareholders, which would be taxable at the marginal rate.
Other taxes: The Company would have to pay a Section 438 Income Tax liability of €55,000 on the loan of €220,000.  The tax would be repaid by the Revenue to the company  pro-rata to the amount that you repay the loan. (Section 438 is designed to be a dis-incentive to directors taking out loans instead of income.)  
Jim Stafford


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## k06351000 (17 Dec 2020)

Thanks Jim, great info. (Well not so great in terms of good news-but very clear and concise!)


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