The tax charge on loans between a director and their company increased from April. Such loans are common practice, but problems can arise if these transactions are not properly accounted for.
There are various reasons why a director can end up having an overdrawn loan account with their company, but the tax charge is the same regardless. A higher charge is payable from 6 April.
The tax charge mirrors the dividend higher tax rate. With dividend tax rates increasing, it has gone up by 1.25 percentage points to 33.75%. The charge is payable when a director, who is also a participator, has an outstanding loan with a close company and the loan is not repaid within nine months and a day of the end of the company’s accounting period.
Broadly, a participator is a shareholder in a company, and a close company is one controlled by five or fewer participators.
A loan to a director should be approved by a written ordinary resolution from the shareholders, although this can be done retrospectively. Approval is not required for loans up to £10,000, or for indirect loans such as where the company has paid for a director’s personal expenses.
How the tax charge works
When a director’s current account is overdrawn, this can be cleared by the company voting the director a dividend or bonus. There might be situations, however, where this does not happen.
For example, on 1 July 2022, a director withdraws £100,000 from their personal company to help fund a private property purchase. The company has an accounting date of 30 June.
- The loan falls in the company’s year ending 30 June 2023, so there will be no tax charge if it is repaid by 1 April 2024. So, by careful timing, the director will have had use of company funds for 21 months, with the only tax being what is charged for having a beneficial loan.
- If not repaid by 1 April 2024, the company will have to pay a tax charge of £33,750 (£100,000 at 33.75%) along with its corporation tax liability.
- The tax charge will be refunded by HMRC if – after 1 April 2024 – the loan is repaid or written off. A write off will of course have tax implications for the director.
Anti-avoidance provisions prevent abuse of the nine-month and a day repayment rule. This means that a loan cannot be repaid just before the deadline, to be immediately followed by a replacement loan. Such bed and breakfasting arrangements do not work, with relief only given for genuine repayments.
It might well be the case that it is cheaper, in tax terms, to simply leave a director’s loan outstanding. This could be the situation if the only way to repay it is by taking a bonus that, apart from being taxed, will also mean both employee and employer NICs are payable. The repayment could take several forms:
- A dividend will often be the favoured option, but this could be impractical if there are other shareholders who – not being in the same overdrawn loan position – don’t wish to receive additional dividend income.
- Although clearing a loan before the tax charge is due is generally preferable, there is no reason why dividends cannot be used to clear a loan over several years.
- The director could introduce funds into the company, for example from a property disposal.
- Another, often overlooked option, is the director transferring assets to the company, with the value transferred then credited to their director’s loan account. Other tax considerations come into play when it comes to a car or property, but, for example, a personal loan owed to the director can be assigned to the company.
Please get in touch with us if you may be affected.