HM Revenue & Customs (HMRC) have a director's loan accounts toolkit for advisers. This is our enhanced (freeview) version with planning points.
Subscribers, click here for your detailed version.
At a glance
- A Director's Loan Account is created for accounting puposes when a director borrows money from their own company, or if a company make a payment for a private item on the director's behalf.
- A loan account may be created on a temporary basis or it may be made on a longer term basis
- A director is permitted to receive loan advance from their own company provided that it is not in financial difficulty, this is also subject to the provisions set down by its Articles and the requriement of the Companies Act.
- Shareholder approval is required for larger loans.
A director's loan account or an overdrawn director's current account is described as a 'Loan to a participator' for the purposes of Corporation Tax and Income Tax.
If a director’s account is not repaid within certain time limis, this create tax complications for both the company and its director.
- Company tax: a section 455 tax charge.
- Income Tax: a taxable benefit on interest-free loans or tax charges on write-off.
- Compliance: Corporation Tax return extra schedules and P11D reporting.
Company tax charge on outstanding loans to participators: s.455 CTA 2010
- When a director (or any other participator in a close company) is made a loan that is left outstanding for more than nine months after the company’s accounting period end, the company will be required to pay tax under s.455 CTA 2010.
- Section 455 tax is payable at 33.75% of the outstanding loan balance (32.5% to April 2022 and 25% for loans made before 6 April 2016).
- Anti-'bed and breakfasting' rules apply where a loan is repaid and then a similar sum advanced shortly after
- See Subscriber Guide to Directors' loans.
Top tips and planning points
- When is s.455 tax payable or repayable?
- How to calculate the tax charge.
- How do the anti-avoidance rules work?
- Workings and examples.
- See Subscriber Guide to Directors' loans
Taxable benefit: if the loan is interest-free and exceeds £10,000
- If the overdrawn (debit balance) on a director's current account with the company exceeds £10,000 it is treated as an employment-related loan.
- A taxable benefit will usually arise on an employment-related loan when the employee does not pay interest to the employer at HMRC's official rate of interest.
- The taxable benefit is reported on form P11D.
- For more detail and planning tips: see Subscriber Guide to Directors' loans
Write off or release of an overdrawn director’s loan
When a Close company writes off or releases a loan made to a director:
- who is a participator, the amount released is treated as a distribution, or
- who is not a participator, the amount is taxable as employment income.
In most small companies the director will be a shareholder and will be entitled to vote at board level and so will be a participator. The distribution treatment will apply to any loans made and written off to the director or their family.
Write off of a loan from a director
Where a director makes a loan to a company that is written off a number of different tax consequences may well apply: see Close Company Loans Toolkit.
The s.455 tax charge is used to deter tax avoidance using close company loans, where a close company:
- Makes a loan advance to an LLP in which a member is a participator or associate of a participator.
- Makes a loan advance to a trust in which a trustee or beneficiary is a participator or associate of a participator.
- Is party to an arrangement which confers a direct or indirect benefit to a director, or
- uses 'bed and breakfasting', that is, where a loan is repaid shortly before the 9 month period elapses and a new loan advance is made shortly after.
These affect loans and repayments made on or after 20 March 2013 and are covered in detail in our Close Company Loan Toolkit.
Overview & FAQs
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