Loans from the company

Produced by Tolley
Loans from the company

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Loans from the company
  • Benefit in kind on ‘Cheap’ loans
  • Loans to participators
  • Dealing with debit balances on directors’ loan accounts
  • Credit a dividend to the loan account to clear or reduce the loan
  • Leave the loan outstanding
  • Take salary or bonus to repay the loan
  • Release or write off of the loan
  • Potential pitfall ― net bonuses following the ‘McVeigh’ case

Private companies are permitted to make loans to their directors, provided that shareholder approval is obtained.

The main tax implications of loans from companies to their directors are:

  1. •

    a possible taxable benefit in kind for the director, and

  2. •

    a tax liability for the company where the loan is unpaid nine months after the period end, if the director is also a participator. For loans made on or after 6 April 2016, the rate of tax is 32.5% (for loans made prior to 6 April 2016, the rate of tax was 32.5%)

This is dealt with in more detail below, together with some ideas for dealing with directors’ overdrawn loan accounts. In practice, controlling directors having overdrawn loan accounts is very common. This is particularly the case where they have previously operated as an unincorporated business and drawings did not have repercussions on taxation.

Benefit in kind on ‘Cheap’ loans

When a company lends money to an employee, this is likely to give rise to a taxable benefit on which income tax and Class 1A NIC are due. The cash equivalent of the benefit is calculated using HMRC’s official rate of interest. If no interest is charged or the interest rate is less than the official rate of interest, the cash equivalent is the difference between the interest that would have been payable at the official rate of interest and any interest which is paid.

Benefits in kind are reportable on Form P11D (they cannot be included in benefits which are put onto payroll) and on the employee’s tax return.

On Form P11D, interest-free, or low interest, loans are reported separately in Box H. Where the company is a close company, directors can opt to aggregate loans under ITEPA 2003, s 187. This election is effectively made via the P11D.

The director is required to report the benefit in kind as declared on the P11D. The director is not able choose an alternate aggregation of loans on their self assessment

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