If you’re a director and shareholder of a contractor limited company, your finances probably aren’t very straightforward. Most directors receive their income in a combination of salary payments and dividends, making their financial situation a little more complex than the average PAYE employee. In many cases, contractors end up with cash accumulating in company bank accounts throughout the year.
As a result, a lot of contractors begin to think up other ways this money can be used, and the subject of mortgages often crops up. As @HiNimbleJack says:
“With many offset mortgages offered on the market, contractors feel the money is best used to offset their mortgage saving them money on their payments.”
However, using limited company money to offset a mortgage isn’t as simple as it may seem. Making use of this cash for personal benefit could land you in hot water with HMRC and may end up causing you a lot more trouble than it’s worth.
One route a lot of contractors consider is loaning themselves money from the business account. However, according to government rules contractors are only allowed to borrow £5,000 tax free. Although this isn’t an insignificant amount, it’s unlikely to make a big difference to the affordability of your mortgage. If you go over this £5,000 limit, you’re very likely to attract the attention of HMRC. You’ll then be required to pay interest on the loan at a prescribed rate. If the loan remains unpaid 9 months after the end of the company year, it will give rise to an s455 charge of 25%.
Directors must act in the best interests of the company
According to rules introduced by Companies House in 2006, directors must always act in the best interests of the company. This means that, if removing funds from the company deprives the company of interest, the director is contravening the regulations. If the director is benefiting from the money at the expense of the business they may well find that they fall foul of HMRC.
Sole traders and partnerships
A lot of contractors ask about offset mortgages because they’ve read about them online or seen them mentioned in literature from their financial provider. However banking products that allow business owners to use their company funds to offset personal debts, such as mortgages, are primarily designed for sole traders and partnerships. In these cases, the sole trader or the partners’ finances will be very closely entwined with those of the company. In some cases they may not even have a separate account for the business.
Unfortunately for contractors, using funds held by a limited company to offset a mortgage is never recommended. This avenue is fraught with pitfalls, since it causes a number of problems with HMRC and potentially incurs penalties and extra interest payments. To find out more about different mortgage options available, or to talk to an expert member of our team about your financial situation, explore our site or get in touch with us today.
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Written by: Andrew Page