When you’re deciding what to do with surplus cash in your business, one slightly more innovative option you could choose is to lend your money to another limited company, charging interest on it.

Other businesses might prefer to borrow from you, as the interest rate you’ll charge will likely be lower than a bank or building society.

To do this, you need to create an iron-clad loan agreement that includes all terms and conditions. This protects both their business and your money.

However, aside from the money you can make in interest, there are few other tax advantages of a company-to-company loan.

These loans are not considered a business expense, so they’ll do nothing to reduce a Corporation Tax liability. In fact, even the interest you receive will count as income, meaning you’ll have to pay Income Tax on it.

And obviously, if the company you make your loan to goes out of business, you could end up losing your entire cash sum.

Pros
  • Produce income from interest accrued
  • Invest in a company you believe in.
Cons
  • Doesn’t actively reduce your tax liabilities
  • Potentially high risk, depending on who you loan to.

 

Calculate whether the interest you could receive outweighs both the effort of loaning your money, the risk of losing your money, and any Income Tax you’ll pay.

Alternatives to company-to-company loans

If you’d like to find out alternatives to a company-to-company loan, you can read our free guide with six more strategies for dealing with surplus cash in your business.

You can download your free guide right here.

Alternatively, please email hello@cordinerwealth.co.uk or call 0113 262 1242 for more information.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.