How to get more from your offset mortgage
The big differential between savings interest and borrowing rates means that offset mortgages can save you money. But can you use your company’s cash to improve the deal without the Taxman asking for a slice of the action?
Offset idea
The offset mortgage is a neat idea. Instead of earning interest at a derisory rate on your savings while paying a much higher one on your home loan, you can use them to reduce the amount of loan on which you pay interest. For example, where you’re getting interest at 1.5% on £20,000 of savings but paying a mortgage at 5.5%, you can give up any return on your savings in exchange for paying no interest on an equivalent amount of the home loan. This would net you £800 a year (£20,000 x (5.5% - 1.5%)). But what if your own cash is stuck in the company bank account?
Offset not cancel
When you offset your savings against your mortgage, they still keep their separate identities, i.e. they’re still available to draw on if you want. The basic mortgage borrowing also stays the same. The offset is just as the name suggests: one is used to reduce the interest on the other. But what if most of your savings are tied up in your company account? If you shift them into your personal account, even as a loan, the Taxman will want to know about it and a bill is sure to follow.
Tip. If you’re a director of a family company, say one owned by you and your spouse, some mortgage lenders will allow you to use money held in a company bank account as part of an offset arrangement. But how will the Taxman react?
Arrange, guarantee or facilitate?
Where you use your company’s bank account in an offset mortgage arrangement, the likely response from the Taxman is that you are in effect borrowing money from your company. But as long as the offset scheme is already linked to a personal savings account before you link the company one, you’re OK. The tax rules at s.173(2)bof the Income Tax (Earnings and Pensions Act) 2003 (ITEPA) say that unless the company is “arranging, guaranteeing or in any way facilitating a loan” to a director, it won’t count as a taxable benefit. And where the loan already exists, none of these conditions will apply. One nil to the director!
Trap. If the offset agreement with the lender allows it to permanently set the money from a savings account against your mortgage, that would count as a guarantee and therefore be treated as a taxable loan to you.
Connected benefit
As he failed the first time, the Taxman might try a different tack. There’s a catch-all clause at s.202and s.203 of ITEPA that says any expense your company has to meet in connection with a benefit will be taxable. The Taxman could argue that the interest your company loses as a result of offsetting its savings against your mortgage is an expense. It’s a fair argument but it means you would have to pay tax only on the interest that the company would have earned. So, using the same facts as in the example, you would have a tax bill of up to £150 (see The next step) which would reduce your overall saving from £800 to £650 per year. That’s still a nice result.
For the full calculation behind the example, visit http://companydirector.indicator.co.uk (CD 12.01.06).
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