If you operate as a contractor through your own limited company, you may be asked, or you may want to loan money from your limited company to another. It may be the company asking for the money is a start-up and they need extra cash to get the venture off the ground. Or, the company may need to purchase an expensive piece of equipment and they don’t have the money to fund it themselves.

If you’re in the position to make the loan, it’s important to understand if this allowed and if so, what tax implications (if any) this has.

Are loans between limited companies allowed?

man in suit with thumbs up.

The good news is, that loans between limited companies are allowed. However, the loan is only allowed if the company making the loan has sufficient funds to cover any liabilities that may arise during the period that the money is outstanding.

Why loan money from a limited company?

Some companies prefer to loan money from another limited company instead of a bank, particularly if they need access to the money quickly, as organising a bank loan can be a lengthy process.

What should a loan agreement include?

Hands signing agreement.

A loan agreement is a document that details the specifics of the loan.  A typical loan agreement contains details of the lender, the borrower, the amount to be loaned, the start date of the loan, repayment date and if the loan is be paid through instalments or in a lump sum.

It may be tempting to write this yourself, but if for any reason, the borrower defaults on the loan, you want to ensure that you’ve covered everything in the agreement, so you can get the money back. For that reason, we strongly advise that you engage the services of a solicitor to assist you.

Interest on the loan

The draw for many companies to loan money to another limited company is that the rate of interest that is applied is much lower than that of a bank loan. Interest on a loan between two limited companies is charged at 3% above the Bank of England’s interest rate. Whilst, on average a bank charges around 7.5% interest on a business loan.

Are there tax implications in making the loan?

The loan is not treated as a business expense, therefore it does not reduce your Corporation Tax liability. The money you earn from the interest on the loan is classed as income and will be taxable.  When lending funds, it is important to consider that the trading status of the company may be affected and therefore restrict any future intentions on using entrepreneurs relief.

As you see, loans that are made between limited companies is an extremely complex area of tax and it’s vital that you seek professional guidance. Our directors are on-hand to offer advice and to guide you through the process. Give us a call on 01962 867550 to arrange a time to chat, or if you prefer you can send us a message via our website.