Loans can be scary. When you’re accumulating more bills than income you can start to feel the weight of the world on your shoulders. When you take the plunge and take out a loan you should know which one is right for you and which ones might put you in a worse position in the future.
Generally, the only time you would need to pay tax on a loan is when the debt is forgiven; in which case it would become income and income tax would need to be paid. However, with some loans you can get tax reduction on your accumulated interest. Personal interest, for example, is not deductible. Payday loans and loans to purchase vehicles or cover personal expenses don’t have tax deductible interest because they’re high risk. Usually the majority of the cost that people pay back with these types of loans comes from interest, so the principle is that making them a tax deduction could potentially encourage people to take out these kinds of loans frequently. Student loans, mortgages and home equity loans, on the other hand, can be tax deductible if they meet certain requirements.
For business owners, the requirements for your loan interest to be tax deductible follow a similar principle. If the loan was used to cover personal costs then it isn’t tax deductible, but if it was use for your business then it is. Personal costs also cover sole traders who have credit cards to cover both their own expenses and the expenses of their company. If you have at all combined your personal debt with your company’s debt the any loans you take out will not have tax deductible interest.
If you own a business, either independently or with other members, and have taken out a loan that you’re unable to pay back then you it can be a little scary, but you do have options. If the loans you took out are under a company or a limited liability partnership that you own then you can negotiate a plan with your creditors to pay them back in smaller amounts over a period of time.
With the permission of all of the directors or members you can apply for a Company Voluntary Arrangement (CVA). This is a legally binding agreement that you make with your creditors to repay your outstanding debt over a period of time in more manageable amounts. This sort of arrangement can practically save your company from being overwhelmed by debt. Consulting specialists, like TaxGone, to assist with CVAs can help you negotiate the most beneficial repayment arrangements for your company. They can offer expert advice on the insolvency process, help with negotiations with your creditors, and give you a breakdown of exactly what’s going on and what you need to do to keep your company away from liquidation.
If you’re the sole vender, however, you could look into an Independent Voluntary Arrangement (IVA) which functions similarly and can help you avoid bankruptcy. The difference here is that because you’ll be using your own, personal funds to pay back the loan you should consider seriously whether or not you can afford it and if the arrangement is realistically manageable.