Directors' Loans
Posted on 5th June 2017
If you need to borrow money from your limited company, you can do so with an interest-free, or low-interest Director’s Loan. So long as the company isn’t in financial difficulty, shareholders have offered approval, and the board have agreed on the terms, a director’s loan can be a very cost effective way of borrowing money. However, there are two common pitfalls you’ll want to avoid: paying additional Corporation Tax and Benefit in Kind Tax.
Directors' Loans: What you need to know
If you need to borrow money from your limited company, you can do so with an interest-free, or low-interest, Director’s Loan. So long as the company isn’t in financial difficulty, shareholders have offered approval, and the board have agreed on the terms, a director’s loan can be a very cost effective way of borrowing money. However, there are two common pitfalls you’ll want to avoid: paying additional Corporation Tax and Benefit in Kind Tax.
Corporation Tax
Under s455 of the Corporation Tax Act, a directors’ loan must be paid back in full within 9 months of the period end date. Any outstanding amount at this point will be subject to 32.5% Corporation Tax. This can easily be avoided by ensuring you take out the loan at the right time.
All outstanding directors’ loans (to both directors and shareholders) must be disclosed in your accounts and on the company tax return at each period end. As such, if you take out the loan on the last day of your company year, you will have 9 months and 1 day to repay the full amount. To ensure you have the longest repayment period (21 months), take out the directors’ loan on the first day of your company year instead.We would also strongly advise against repaying the loan and then instantly taking out another. HMRC are likely to consider this action as tax avoidance, and will tax the first loan as though it was never repaid.
The good news is, even if you find yourself caught out with the additional Corporation Tax payment, the HMRC will repay it once the loan has been repaid to the company. Of course, it’s still an inconvenience we imagine you’d be keen to avoid.
Benefit in Kind Tax
The second pitfall to be wary of is creeping over that £10,000 threshold into benefit in kind territory. If the loan is greater than this amount, it becomes an employment-related loan, and as such, will be subject to benefit in kind tax. Speak to us directly for advice on how to keep your salary and any directors’ loans below the £10,000 threshold.
It’s worth noting that benefit in kind tax only applies to interest-free and low-interest loans, so you’ll be exempt from this if you’re paying interest of 2.5% or more. Loans used for ‘qualifying’ purposes (i.e. a director buying an interest in a partnership) are also exempt from benefit in kind tax.
Lastly, keep in mind that if you decide to write off, or ‘release’ the loan, you’ll have to pay National Insurance and income tax on the full amount.
Get in touch for advice on taking out a directors’ loan and avoiding having to pay additional Corporation and Benefit in Kind taxes.
Written by:
Nicola J O'Sullivan -
Effective Accounting
Founder | Xero Champion | IR35 Expert
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