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Using the Personal Savings Allowance from April 2016

First Published: December 2015 | Available in: Property Articles Your Property Network

By specialist property accountant Stephen Fay ACA

A new Personal Savings Allowance (PSA) is being introduced from April 2016, which could have some useful benefits to property investors who also lend money, and for those with a significant credit balance on any director’s loan account they may hold. This article explains how to make use of the PSA, and how to communicate the value to JV investors.

What is the Personal Savings Allowance (PSA)?

The PSA is a new allowance which allows a Basic Rate Taxpayer (total income below £42,700 for tax year 2016) to earn £1,000 of tax-free interest income. For Higher Rate taxpayers, the allowance is worth £500.

From April 2016, banks will also stop automatically deducting 20% income tax from interest paid on cash deposits not held in an ISA.

So how could this help me?

There are three main scenarios in which the PSA could be useful:

1. Company directors with a significant credit on their director’s loan account

Where a director funds a company, perhaps in the early stages of the company’s life, or to top up cash reserves or fund company expenses, the company then owes the funds back to the director, and this creates a credit on the director’s loan account with the company.

Often, the credit balance can be substantial, and many landlords over the next few years will be transferring personally-owned rental property into a property company in order to avoid the forthcoming mortgage interest relief restrictions. When such a transfer takes place, the equity held in a property is credited to the director’s loan account, meaning a substantial credit can result.

Traditionally, it rarely makes sense to charge the company interest on a director’s loan account credit, as the director would pay tax on the interest received, and so this is usually a ‘tax-neutral’ option, and so no benefit arises.

However with the new PSA, the director could then earn £1,000 of interest from the company tax-free, and the company can include the expense in its accounts as a deductible item. The result would be a £200 corporation tax saving plus no tax due by the director.

As many small companies are managed and owned by spouses (or partners), the benefit could be doubled by splitting the director’s loan account between two directors, and so allowing £2,000 of interest to be paid tax-free per year. And, for investors with children or family who are aged 16 or over (the minimum age to be a company director), having several directors can mean the £1,000 interest allowance can be paid out to each individual.

A reasonable interest charge by a director to a company would be 15% of the credit balance i.e. 15% is the rate informally considered by HMRC to be a commercial rate of interest on an unsecured loan to a company.

With the new dividend tax regime starting in April 2016, using the PSA will be standard profit-extraction advice for all company directors with a credit on their director’s loan account, given that dividends above £5,000 will become taxable for everybody.

2. For investors who want a better return on their cash reserves

Quite rightly (in my view), many property investors hold a pot of capital as their emergency reserves, and usually received only a modest return from their bank.

Similarly, many investors with cheap tracker mortgages prefer not to repay such borrowings as there would be little impact on overall indebtedness and interest payable

Lending funds to other property investors could from April 2016 be a sensible use of any spare cash, given that the PSA allows the interest income to be received tax-free (up to £1,000/annum for Basic Rate taxpayers. Obviously care should be taken to conduct proper due diligence on the borrower, and not to leave oneself short of cash reserves, but this could now be a useful extra tax-free income source.

3. Attracting JV investors by explaining the benefits of the PSA

As property investors, we are always on the look-out for funds to invest – and with the new PSA, we can now provide a tax-free return to Joint Venture investors.

For example, borrowing £40,000 from a Basic Rate taxpayer couple, would mean that a reasonable return of say 5% (£2,000) could be provided tax-free to the couple – the funds could also be borrowed over more than one tax year and interest accrued into each tax year, to use up two years of PSA.

Admittedly, these sums are not going to make a huge difference for many investors, but ‘every little helps’. We often see friends and family lending funds to our clients, often to fund refurbs after a property is purchased, and if the returns can be provided tax-free, this is an added incentive for such lenders.

Summary…

The July 2015 Budget brought some bad news for landlords, however the introduction of a new Personal Savings Allowance is a useful tax relief for property investors with a credit on their directors loan accounts, or for those who lend or borrow from private investors. Like many tax reliefs, while sometimes the benefits appear modest, the cumulative impact of such tax reliefs over time can really add up.

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