Every startup needs working capital to grow, and there are several ways to get this… but which one is the best? As the founder or owner, you could provide capital by purchasing more shares or by simply lending your company the cash. This could offer a more speedy return on your investment, and make you more tax efficient at the same time.
- Is funding by buying shares not advisable?
Many people buy shares in order to provide more capital, and while there is nothing wrong with this, depending on your situation there may be other, more beneficial ways. One of the biggest disadvantages of buying shares is that you may need to wait a while for any Return on Investment (ROI). Your company can pay you dividends but only when it is making a profit and in the case a new startup business, it may take a while. There’s also no guarantee that you’ll see a return on your investment at all.
- What’s so great about funding by loaning capital?
If you’re looking for a faster ROI as many founders, then lending your company the money could be the way to go forward. Providing a loan means that you can be paid interest straight away, plus loans are generally more flexible than being paid dividends as you can receive some or all of your money back without being required to cancel share capital, which could significantly affect your tax. This leaves you with more control of your money, which as an investor, feels much safer.
- How can being married help?
If you happen to be married or in a civil partnership, then lending to your company could bring you even better tax advantages, so it’s worth exploring this avenue fully.
These tax advantages also work if you are unmarried with a “significant other”, however as a general rule, it’s much easier if you have combined finances through a lawful marriage or civil partnership.
This arrangement can help you save on tax if your partner pays a lower rate of tax than you do, as they can lend you money and charge you interest. You then lend the money to your company and charge the company a similar interest rate.
- How does this work?
Doing things this way requires that a) the interest is taxable, and b) any interest paid on qualifying loans that are used for company funds, the purchasing of equipment, or for working capital for a trading company are tax deductible.
Here’s an example that breaks this process down:
Joe is a director, shareholder and higher rate taxpayer of the Joe Bloggs Ltd., and the business requires some new equipment. Joe’s wife Jane is a basic tax payer, and so she makes an interest-free loan of £100,000 to Joe, who then lends this to his company Joe Bloggs Ltd., charging interest at 7% per annum.
Joe is liable for tax of £2,800 (£7,000 x 40%) on the interest he receives from Joe Bloggs Ltd. Joe doesn’t pay Jane any interest which means there is no tax relief for him to claim (though the loan to Joe Bloggs Ltd. does qualify).
Alternatively, if Jane decides to charge Joe the same rate that he charges Joe Bloggs Ltd. (7%) instead of an interest-free loan, then the interest Joe pays Jane will be tax deductible. This means the taxable interest (£7,000) he is paid by Joe Bloggs Ltd. equals the tax deductible interest he must pay to Jane. One cancels out the other, and instead of paying £2,800 in tax, Joe pays nothing.
Jane’s loan to Joe isn’t a qualifying loan, so she will have to pay tax on the interest she receives from him. Luckily, as Jane is a basic rate taxpayer, her bill is £1,400, meaning a tax saving of up to £1,400, and possibly much less depending on Jane’s other sources of income. As mentioned earlier, the advantage of doing things this way means that even if Joe Bloggs Ltd. is not making a profit at the moment, it can still pay Joe a return on his loan. This is often the best and most tax efficient way for company founders to provide capital to their business.
Want to find out more about how this could help make you more tax efficient? Get in touch with our team at Price & Accountants to discuss how we can help. We are committed to helping small businesses in London and around the UK with their accounting needs, using Xero online accounting software and our expert team of advisors, all dedicated to helping your business flourish.
If you have recently sold a residential property, you will likely have made a healthy capital gain and discovered that special higher tax rates apply to this. There may be a way to defer paying this tax and reduce it overall. Here’s how:
- EIS tax reliefs
Investing in a company which qualifies for EIS (Enterprise Investment Scheme) tends to offer a few tax advantages, such as up-front income tax relief, capital gains tax (CGT) free growth on the investment and capital gains tax deferral relief.
CGT deferral relief means you can defer the taxation of any capital gain you made in the previous year or the three years following your EIS investment. When this happens, the gain becomes taxable only when you sell or transfer your EIS investment.
Let’s look at an example to demonstrate this process:
Joe makes capital gains of £100,000 in 2018/19, and makes a qualifying investment of the same amount in an EIS company. He claims CGT deferral relief, meaning he is not required to pay the capital gains tax that would be due on 31st January 2020. Joe then sells his EIS shares in 2025/26, triggering a tax charge on an amount that is equal in value to the deferred gain taxable for that year.
- How does this work for residential property gains?
If you have recently sold a residential property, then you will know that the rules explaining how the deferred gain will be taxed are worded in a very specific way, and you can make the most of this by doing research and using the rules to your advantage.
As of April 2016, rates of tax on capital gains are 10%, as long as your income combined with the gains comes to no more than the income tax basic rate band. If they exceed this, they are then taxed at 20%. However, when the gain concerns residential property (such as houses, flats, apartments, land intent for building, and so on) the rates are 18% and 28% respectively.
- How does EIS deferral relief help you be more tax efficient?
By using EIS deferral relief, you can change the nature of a residential property gain to a non-residential one, and therefore benefit from the lower, normal CGT rates of 10% and 20%. You’re probably wondering why more people don’t do this? Though this tax-saving arrangement is entirely legitimate, HMRC discourages it by making the rules hard to get around (but not impossible).
- How do you overcome HMRC guidelines?
It’s difficult to find information that helps you navigate HMRC guidelines, especially since there are a lot of varying answers online. Some sites will indicate that the previously deferred gain is only liable for CGT at 10% or 20%, and others (more in line with HMRC guidelines) will tell you that the deferred gain retains its original status as a residential property gain. Understanding the legislation is the key to making this distinction, and this is something that Price & Accountants can assist you with.
- HMRC guidelines in layman’s terms
In the Schedule 5B Taxation of Chargeable Gains Act 1992, you will find the EIS deferral relief rules explained in full. This states that the revived gain is “equal to so much of the deferred gain” in proportion to the amount of EIS investment sold.
Here’s a simple example of this to break it down further:
Joe sold 50% of his EIS investment in 2025/26, so the capital gain taxable is an amount “equal to” the same proportion, i.e. 50% of the original gain. As is often the case, minor, seemingly insignificant wording details in tax legislation can completely alter a tax bill. In the case of the EIS deferral relief rules, an EIS investment could potentially reduce your tax rate by almost half, which is an amazing saving.
- When must this be paid?
By making an investment in an EIS company, you make it possible to defer when tax is payable on the gain, and you will only pay this when you sell or transfer the investment. Although HMRC rules disagree, most tax experts will advise you that the gain changes its nature because of the deferral and so special higher rates of tax no longer apply, helping you be significantly more tax efficient.
If you want to find out more about how your residential property sale could be more tax efficient than you think, get in touch with our team at Price & Accountants. We are committed to helping small businesses in London and around the UK with their accounting needs, using Xero online accounting software and our expert team of advisors, all dedicated to helping your business flourish.
A company car scheme is a great incentive for employees, allowing businesses to attract and retain the best talent, but every year the tax and national insurance that goes along with company cars rises, and it could be costing both you and your company more than necessary. If your car is more than a few years old, it may be more tax efficient to transfer ownership to you. Here’s why:
- How does company car tax work?
If you have been driving a company car for a while, you will likely to know that the income tax is primarily calculated on the list price of the car was new and when it was first registered approval on its CO2 emissions. The price of the car when new will remain the same, but the CO2 emissions will inevitably creep up year after year. When this happens, it means that your company car is costing you more in tax, and your company more in NI with each year that passes. Meanwhile, as with any vehicle that is being used day-to-day, the value of the car decreases. This is why it can eventually become much more tax efficient for both parties if your company hands the car over to you instead.
- What makes this more tax efficient?
Let’s look at an example of this in action to explain how it works:
Jane gets a new car from her company, Acorn Ltd., which costs £28,000 as of April 2014. It is estimated that this car will be replaced in April 2021. At the moment, the car is worth £12,000, and has CO2 emissions of 175g/km. Jane will be taxed on £10,360 in the year 2019/20, and also in 2020/21 (total: £20,720) and Acorn will be required to pay Class 1A national insurance on this amount.
If, instead, Acorn gives Jane ownership of her company car on 6th April 2019 (the beginning of the new tax year), they will only need to pay a one-off tax and national insurance charge on £12,000, saving them money in the long run. As a higher rate taxpayer, this transfer will mean Jane saves £3,488 in tax, and Acorn saves £1,203 in national insurance.
- Surely that’s a no-brainer?
For the most part, it is. But while this may seem like a great idea, before you jump ahead and start the process there are a few other things to consider, primarily the cost of running the car as this can affect the cost effectiveness of this plan. If Acorn Ltd. pays the running costs of the vehicle and gets tax relief on these costs, they can continue to do so even after the car has been transferred to Jane. However, this would mean Jane will need to pay tax on these running costs paid by Acorn – why would Jane do this, you ask? Basically, she wouldn’t. To further equalise things and make the transfer fair on both parties, Acorn can pay Jane a mileage allowance for her business journeys, counteracting this tax and making both Jane’s and Acorn’s costs lower overall.
- How can my business pay me a mileage allowance?
Imagine Acorn Ltd. pays the running costs of what is now Jane’s car (let’s say £1,600 in 2019/20 and £1,700 in 2020/21). During this period, Jane drives 9,000 business miles, and because she now owns the car Acorn can pay her up to 45p per mile (tax and NI free) to cover the cost of fuel and any other charges she may incur.
If the cost of fuel comes to, for example, 13p per mile, this leaves an extra 32p per mile that Jane can use to partially pay back Acorn for the £3,400 worth of running costs it pays, leaving a mere £520 liable for tax and national insurance.
This of course means that the saving made by Acorn is reduced by transferring the car to Jane, but overall both parties are still much better off than they were previously.
- Look into the tax and national insurance of company cars that are more than a few years old, and identify where there are savings to be made depending on the car’s list price, CO2 emissions, mileage and running costs.
- Make sure your contract is directly with the insurance company or garage, as this will ensure your tax and national insurance are as cost effective as can be when your company pays the running costs of your own car.
- When your company transfers the company car to you, they lose an asset, so in the example above, Acorn lost £12,000 from their balance sheet because the car no longer belongs to them, it belongs to Jane. As long as Jane is the only shareholder in Acorn then this won’t matter, but if other shareholders are involved, then this transfer may need to be compensated.
If you would like further clarification on the above, or want to find out more about becoming even more tax efficient with your company car setup, get in touch with our team at Price & Accountants to discuss how we can help. We are committed to helping small businesses in London and around the UK with their accounting needs, using Xero online accounting software and our expert team of advisors, all dedicated to helping your business flourish.