CAN CLOSE COMPANY STATUS BE USED TO YOUR TAX BENEFIT?
Do you own a close company?
A close company is one in which all of the following apply:-
• your Company is controlled by 5 or fewer people;
• it is not based outside the UK, and
• no more than 35% of the share capital is publicly held
As you can see these are conditions which mean that most owner-managed Companies would be described as a
close company. Usually this is not very good from a tax perspective. It is one of the rules used to determine
whether s455 tax is charged on a directors overdrawn loan account. However, under certain conditions, there is
a way you can turn it to your advantage.
What are the other conditions that I need to meet?
You can qualify for some loan interest tax relief if you:
1. work full-time for your company; or
2. own at least 5% of its ordinary shares (the 5% shareholding can include shares your spouse owns); and
3. have a mortgage or loan that doesn’t qualify for tax relief, and
4. your Company has some value to it.
So what do you have to do?
Essentially, the plan involves selling a portion of your shares to your spouse and converting your non-tax-relief
loan interest into tax-relief loan interest in the process.
Example. Jonathan is the major shareholder in B4B Ltd. His wife Jenny is a manager working for another firm. They are both
40% taxpayers. The balance of their home mortgage is £100,000 and the annual interest on this is £5,000 for which no tax relief
is due. They take the following steps:
1. Jonathan sells £100,000 worth of his B4B shares to Jenny. There’s no Capital Gains Tax or Inheritance Tax to worry
about because of the special rules which apply for transfers between spouses – see my blog on LinkedIn for more details.
2. Jenny takes out a loan of £100,000 to pay for the shares (which can be done as an extension to the existing mortgage).
3. The £100,000 Jonathan receives from Jenny is then used to pay off the original mortgage.
The result is that some of Jonathan’s equity in B4B has been released and used to replace a loan for which no tax
relief can be claimed with a similar loan on which it can!
Caution: There will be costs involved with this, such as loan arrangement fees (which varies from bank to bank) and Stamp Duty
at 0.5% of the value of the shares (£500 in this case),
Benenfit: However, the tax saving will usually outweigh the costs. For Jonathan and Jenny the extra tax relief will be worth
£2,000 for the first year alone (annual interest £5,000 x 40% tax relief). So provided the costs are outweighed by the longer-term
tax savings, it’s worth doing.