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Sam
Sam, Accountant
Category: Tax
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When my son and I set up our business of letting student houses

Resolved Question:

When my son and I set up our business of letting student houses we did so with the injection of some £39000 of my money. That money was ring fenced and given priority for repayment when funds were available but no interest was charged
That money has started to be paid back however our present accountant says that this money £500 per month is still profit the business has made and tax has to be paid on it.
I disagree as this is the repayment of a loan although no interest has been charge and there should be no tax payable either by the business or by myself who is receiving the money. My view is that the repayment of the loan is a debt that the business must deduct from profits like any other payment out AND only any element of interest that I receive is taxable and that no tax is payable on the repayment of the principle. The fact that I do not charge interest might be a problem because in effect I have given the business an interest free load.
I would appreciate your thoughts. Last years tax return has already gone in and resulted in a rather large tax bill
Submitted: 3 years ago.
Category: Tax
Expert:  Sam replied 3 years ago.
Hi

Thanks for your question

Your accountant is right, when a loan is repaid from the business, then only the interest element is deemed to be an allowable expense, and as you have not charged any interest, and its merely the capital being repaid, then there is noting to claim.

And as you will get the benefit of the actual £39,000 elsewhere - whether this was used to purchase a property (so at any capital gain stage)or fund the business itself, as expenses incurred (and already claimed) you cannot have in essence have it twice.

See this link from the Business Income manual
http://www.hmrc.gov.uk/manuals/bimmanual/bim45690.htm

You can see only interest is ever allowable (of course if the funds are used for business purposes)

I am sorry the news is not more favourable

Thanks

Sam
Sam and other Tax Specialists are ready to help you
Customer: replied 3 years ago.

So what you are saying is that when I receive the capital payment from the business I have to pay tax on that money and the repayment from the business is not a legitimate expense

Expert:  Sam replied 3 years ago.
Hi

NO - you personally do not pay tax on the money you receive from the business as it was a loan and you are not earning interest on this loan repayment (so no tax liability arises) so you do not have to declare that you are receiving this money, as it has no tax liability.

But the loan being paid from the business is not an allowable expense as the introduction of that capital into the business, has seen that money already accounted for (either through the purchase of the business or on expenses arising) so ONLY IF interest was being charged (which it is not) could that be claimed as an expense.

For example - lets look at when interest is charged, then again when it is not -

I have £1000 I put into a business and Im going to charge 10% interest for the year (so I will be paid back £1100) so I personally have mad a profit of £100 out of this arrangement so have to declare (and pay tax) on that £100 - but not on the £1000 as this is merely paying me back my money.

The business uses the £1000 to pay the rent on business premises, so the business gets the benefit of the fact £1000 expense arose on rents - but can only get credit for the £100 interest it is charged for the loan of the money - not the £1000 as well (as its been claimed under the expense for which it was used, had the benefit of the extra out of pocket expense of the interest charged - so cannot also have the element of what's repaid from it as an expenses as well)

So when NO interest is charged - you personally have made nothing from the loan made, you have just got your money back - so you are not profiting from the loan AND furthermore the business can still only have what it used the money for as an expense it cannot also have the money that is paid back - or it would be getting the monies worth twice. And then there is no interest that the business has suffered so no claim for that additional expense

Thanks

Sam