Director’s loansPosted 2016 by Chris Davies
I am often asked by clients what the implications are for borrowings from the company by directors or more accurately “Participators”.
The first issue is the benefit in kind of receiving a cheap loan. If the participator’s loans from the company exceed £10,000, and the participator is not charged interest by the company, then they will be assessed to a benefit in kind at the official rate of interest (currently 3% per annum) and pay tax, typically at 20% or 40% on that benefit. In most cases, it’s a fairly minimal figure. To avoid this charge the company should charge the participator at least 3% pa interest.
As a recap, if a shareholder takes a dividend from the company whilst subject to higher rates of tax, they will be assessed at higher rates of tax. So a dividend of £100,000 would result in a tax liability for a higher rate taxpayer of £32,500 and for an additional rate taxpayer of £38,100 (32.5% or 38.1% of the dividend respectively). That tax is payable by the shareholder personally.
How simple it would be, if rather then taking a dividend, the company could simply lend its participator money. Unfortunateley there are tax implications for the company in these circumstances.
If a participator takes a loan from the company, they have up to 9 months after the end of the financial year to pay it back. If they do repay it within that period, no tax is due. If they do not repay it within 9 months, then the company will have to pay tax on the loan at 32.5% of the amount outstanding. So if the company lent £100,000 and the participator did not repay it within 9 months of the end of the company’s financial year then the company would have to pay £32,500 additional corporation tax. If and when the loan is repaid after the 9 month period, HMRC will repay the tax to the company but it will involve a waiting period.
So for most higher rate taxpayers the amount of tax (ie 32.5%) collected by HMRC is the same, it’s just who pays the tax that is different. Clearly most participators would prefer the company to pay the tax rather than themselves.
As a note of warning HMRC have rules to prevent participators from being tempted to repay the loan shortly before the end of the 9 months and then redrawing it again later shortly afterwards. It has to be a genuine repayment.
A downside of the loan route is that if the company should go into liquidation the liquidator could seek to recover the loans due to the company, whereas if the participator had been paid money from the company in legally declared dividends it would have been theirs to keep.