Several of my limited company clients allow directors/shareholders to overdraw their director loan accounts. What should be considered in this situation?
Making loans to a director
There are a number of tax and company law considerations to bear in mind when a company makes a loan to a director.
The general rule within company law is that a company making a loan to a director must seek the approval of its members however there is an exception to this if the loan is less than £10,000. The company may require immediate repayment of the amount borrowed.
The actual making of the loan in itself does not trigger any tax charges though care should be taken that the loan is not caught as payment of a salary or bonus. The amount advanced may be treated as earnings with the result that PAYE must be applied at the time the funds are made available to the director. HMRC guidance for this is at EIM42280.
There are tax consequences for the period of time the loan is outstanding. The director will incur a benefit in kind charge if the loan exceeds £10,000 at any time during the tax year. If the director pays interest to the company the benefit can be reduced and even eliminated. There are certain conditions attaching to this. The company itself will have a CTA 2010 s455 liability if the loan remains outstanding more than 9 months and 1 day after the end of the accounting period in which the loan is made. The s455 tax is currently 32.5% of the amount of the loan outstanding at that time. In recent years the introduction of specific anti-avoidance legislation has tightened up abuse of these rules.
If the loan is written off tax implications arise. The director/shareholder is treated as receiving a dividend equal to the amount of the loan which is charged to income tax. The amount written off is subject to Class 1 NIC.
If the loan is repaid by the director/shareholder the company will obtain a refund from HMRC of the s455 tax. The s455 is repayable 9 months and 1 day after the end of the accounting period in which the loan is repaid.
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This tax Q&A was published in July 2018 – please be aware that the information above may have changed in subsequent months. This note is written for the general interest of our clients and is not a substitute for consulting the relevant legislation or for taking professional advice.
(This content was originally produced by Croner Taxwise Limited and is reproduced with their permission)