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Paying Interest to Private Lenders in a UK Limited Company: A Straightforward Guide for Property Investors

Paying Interest to Private Lenders in a UK Limited Company: A Straightforward Guide for Property Investors

Hey, property investor!

Venturing into the UK property market with a limited company? Smart move! But here's a heads-up: if you've got some funds from a private lender/investor, there's a tax form named CT61 you'll want to get acquainted with. Before we dive into the CT61 details, let's address the elephant in the room: paying interest to your private lender.

The Basics of Paying Interest to Your Private Lender

When you borrow money from a private lender, you'll typically agree to pay them back with a bit extra as a 'thank you'—this is the interest. Now, here's the crucial part: when you pay this interest, you need to deduct 20% from it for tax purposes. So, if you owe your lender £100 in interest, you'll actually pay them £80 and set aside £20 for the taxman. It's best to be clear about this 20% deduction detail in any loan agreements to ensure both parties are clear from the get-go. The private lender will need to declare any interest they receive on their personal tax return.

A Quick Note

If your loan comes from another limited company, you're in luck—you don't need to set aside that 20%. However, the company receiving the interest should remember to include this in their company accounts and tax return.

Why is the CT61 Form Crucial for Property Investors?

The CT61 form is essentially your way of keeping HMRC in the loop about the interest you've paid any private lenders and the tax you've set aside. It's like giving HMRC a brief update on your financial activities. For a deep dive into CT61, full guidance from HMRC is available here.

The Importance of the CT61

Let's say you've borrowed funds from a private lender to refurbish a property or buy a new one. When you pay interest on that loan, you need to set aside 20% for tax. The CT61 helps you keep track of this.

When Should You Complete the CT61 Form?

The CT61 form is to be completed quarterly, in alignment with the calendar year:

  • Q1: January to March
  • Q2: April to June
  • Q3: July to September
  • Q4: October to December

During each quarter, you'll need to work out the interest paid to your private lender or investor and deduct 20% tax, which must then be reported to HMRC via the CT61 form.

Your CT61 Action Plan

1. Request the Form

Despite it being 2023, HMRC still need you to request the CT61 form and they will then post this to you by carrier pigeon…. It will likely take a while to arrive to visit HMRC's website and request the CT61 form now.

2. Calculate the interest

Determine the interest you owe your lender or investor. Depending on your agreement with your private lender, this could be a monthly payment, an annual payment or something in between!

3. Set Aside 20% tax for HMRC

Deduct 20% from the interest you are going to pay over to your private lender and keep it aside ready to pay to HMRC. If you are looking for a quick way to work out the tax, simply multiply the total interest you are going to pay by 0.20.

4. Pay the private lender

Transfer the remaining interest to your lender or investor and provide them with a note of how you’ve calculated the interest and tax. This is handy for them to complete their own tax return.

5. Complete the CT61

Once you have the CT61 form, fill it out diligently. Then, send it to HMRC within 14 days of the quarter's end. The quarters run in alignment with the calendar year:

  • Q1: January to March – due 14th April
  • Q2: April to June – due 14th July
  • Q3: July to September – due 14th October
  • Q4: October to December – due 14th January

You don’t need to submit the form for a quarter if you didn’t pay any interest.

6. Pay the Tax to HMRC

Finally, transfer the 20% you've set aside over to HMRC.

For Those Receiving Interest

If you're pocketing the interest, ensure you declare this income on your personal tax return. As the interest has already had tax deducted from it, you will add the amount received to your “net interest” received in the year. You may be able to claim a refund if you have your Personal Savings Allowance available.

In Conclusion

Navigating the CT61 might seem daunting initially, but with this guide, you'll handle it with confidence. And if ever in doubt, consulting a tax professional is always a wise move.

Ready to Dive Deeper?

Feeling a bit overwhelmed or just want to ensure you're on the right track? Why not book in for a call with Nicole? As a property-focused accountant, she's got the expertise to guide you through the intricacies of property tax and more.

Note: This guide is intended to provide a general overview and not specific financial advice. Always consult with a professional for tailored guidance.

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