Loans To Directors And ShareholdersWritten on February 28, 2017 by Kirk Rice LLP
A frequent question asked by clients who run their businesses via a Limited company is whether they can take loans from the business.
First, legality – until the enactment of Companies Act 2006 director loans (& shareholders) were generally illegal – although the only party interested in enforcing that was generally the shareholders themselves. That has now changed, and loans to directors/shareholders are now legal, although loans over £10,000 should be approved by the shareholders – normally one and the same of course.
In terms of tax, there are tax considerations for both the company and the director/shareholder.
Company
A special tax charge exists under section 455 of the Corporation Taxes Act. This law dictates that if a loan is made to a director / shareholder then a tax payment equal to 32.5% (25% pre 31 March 2016) of the loan value needs to be paid to HMRC if the loan is still outstanding 9 months after the year end – this tax is repaid to the company 9 months after the accounting year in which the loan is repaid.
Example, assume a company has a 31 March 2017 year end:
- a loan of £10,000 is made to a shareholder on 1 June 2016, and repaid 1 March 2017. As it’s not outstanding at the year end, no s455 tax is due.
- a loan of £10,000 is made to a shareholder on 1 June 2016, repaid 1 March 2018 – as this is outstanding 9 months after the year end, s455 tax of £3,250 is due on 1 January 2018 (along with the Company’s normal Corporation Tax payment). This tax is, all other things being equal, repayable 1 January 2019, 9 months after the end of the financial year of release.
NB: It should be noted that HMRC are wise to “recycling” of lending, e.g repaying a loan a few days before the financial year end and relending it a few days later.
Generally the effect of the above is that a short term loan causes no tax issue, but if the lending goes on beyond 9 months after the financial year end, or is recycled, then the s455 tax charge is effected.
Director
There are further tax consequences for the director personally when a company provides a ‘cheap’ or an interest free loan. Such loans result in a benefit in kind for the director concerned, which is calculated as the difference between the interest the director pays and the ‘official rate’ which is 3% from 6 April 2016. The official rate does change and so it is important that this is checked.
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Example, assume a director loans £20,000 for 6 months from his company interest free: The benefit in kind is calculated at 3% of £20,000 = £600. As the loan is only for 6 months, then this needs to be time apportioned i.e. £600 x 6/12 = £300. The tax due on the benefit depends on whether the director is a basic rate (20%), higher rate (40%) or additional rate (45%) taxpayer. Respectively the tax would be £60, £120, or £135. If the loan is less than £10,000 then no benefit in kind arises. |
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Any reader interested in discussing this topic further can telephone Graham Jennings on 01344 875 000 in our Ascot office or James Moody on 020 8789 8588 in our Putney office. You can also email info@kirkrice.co.uk
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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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