Loan to Director

[graham.walls]

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I want to borrow some money from my limited company and was wondering if anybody has done this and if so whether they could help me.

I understand that to avoid having to pay tax on the loan amount you should pay it back within 9 months of the year end and you should also pay a commercial rate of interest on the loan so that it is not classed and taxed as a benefit. The loan should also be documented.

The things I don't know are what the minimum interest rate I could get away with is and how to account for the interest. If the loan spans a year end do I have to account for interest up to the year end in that years return even though it isn't paid back until the following year or does that depend on the terms of the loan?

[drivetowin]

You might be better off paying yourself a dividend rather than taking a loan.

I would imagine that a commercial rate of interest is anything above the current Bank of England base rate - technically it might be hard to argue that a rate under base is a commercial rate.

Bear in mind that under the Companies Act it is an offence for the Company to lend a director more than £5,000.

[graham.walls]

Thanks drivetowin,

I've already paid a dividend that takes me up to the level for higher rate tax.

I don't suppose you know how the interest should be accounted for? Does it have to be declared as income in just the tax year of payment or for both the tax years that the loan is outstanding?

[Darren M]

Thanks drivetowin,

I've already paid a dividend that takes me up to the level for higher rate tax.

I don't suppose you know how the interest should be accounted for? Does it have to be declared as income in just the tax year of payment or for both the tax years that the loan is outstanding?

You don't need to pay any interest at all, but the revenue does treat an Interest free loan as a taxable benefit. So if you borrow £100k and they deem the interest to be 6%, you have a benefit worth £6k. If you pay tax at 40% that's going to cost just £2.4k per year. Just remember to pay it back in full after 9 months.

[drivetowin]

Technically if you borrow £100K though you are breaking the law - the Companies Act limits the amount a company can lend to a director to £5000.

[Darren M]

Technically if you borrow £100K though you are breaking the law - the Companies Act limits the amount a company can lend to a director to £5000.

You're right, but as this breach of the law is not subject to criminal sanctions these loans are quite common.

Most offences under the companies act are there to protect the shareholders and it would take a wounded shareholder to file a complaint about the loan for a prosecution to take place. In a closed company this shouldn't be a problem. To keep the revenue happy you just need to declare any loan over £5k as a benefit in kind.

You could pay your company interest on the loan at 5%(?) and avoid having a benefit in kind, but this is not the best idea as paying interest into your company will increase your profits and corp tax.

To avoid S419 corporation tax you need to pay the loan back 9 months after your company year end. So if you time it right you can keep the money for a maximum of 21 months. The S419 tax charge is 25% of the loan and although reclaimable is best avoided, as it will take some time to get the money back.

My accountant has advised me to do this and I did some research for myself just to make sure. You can find some examples of very large director's loans on the revenue's website (along with their affect on personal taxation) and no mention of anything illegal.
Part of this article explains the situation quite well - JSA - Taxing Times

[panoslondon1]

Is it OK to borrow say 50K and pay it back very quickly, within 3 months, and certainly before the end of the company financial year? My friend who does the accounts himself said it's fine. If it's not fine do I pay 6% interest on the 50K for 3 months or there are more implications? Thanks.

You're right, but as this breach of the law is not subject to criminal sanctions these loans are quite common.

Most offences under the companies act are there to protect the shareholders and it would take a wounded shareholder to file a complaint about the loan for a prosecution to take place. In a closed company this shouldn't be a problem. To keep the revenue happy you just need to declare any loan over £5k as a benefit in kind.

You could pay your company interest on the loan at 5%(?) and avoid having a benefit in kind, but this is not the best idea as paying interest into your company will increase your profits and corp tax.

To avoid S419 corporation tax you need to pay the loan back 9 months after your company year end. So if you time it right you can keep the money for a maximum of 21 months. The S419 tax charge is 25% of the loan and although reclaimable is best avoided, as it will take some time to get the money back.

My accountant has advised me to do this and I did some research for myself just to make sure. You can find some examples of very large director's loans on the revenue's website (along with their affect on personal taxation) and no mention of anything illegal.
Part of this article explains the situation quite well - JSA - Taxing Times