Managing directors’ loan accounts

Key points

It is not uncommon for directors of a company to take loans from the business during each financial year, often to cover unexpected personal liabilities. The fact that this gives rise to tax and other issues is sometimes overlooked.

Under current tax legislation, loans to shareholders incur a company tax liability (commonly known as “Section 455 tax”) at a rate of 33.75%. The tax is payable nine months after the end of the company accounting period in which the loan is advanced. The Section 455 tax is repayable if and when the loan is cleared. If the loan is written off instead, a further tax liability arises.

The rules are very widely drawn and also catch loans to family members of shareholders and other associated parties.

In the case of most private companies, the shareholders are also directors and in addition to the Section 455 company tax there is a personal tax liability if the loan is interest free or if any interest paid is at a lower rate than the “official rate of interest” (currently 3.75%). This rate changes from time to time, broadly in line with commercial interest rates. This deemed interest is taxed as a benefit in kind.

There are very limited exceptions from these rules but currently directors loans of up to £10,000 are exempt from the benefit in kind rules.

In certain circumstances the loan may also need to be disclosed in the company accounts if it is not repaid by the year end, so its existence may be apparent to creditors and other interested parties.

In addition, company law requirements have to be met, particularly if the loan advanced is more than £10,000.

Managing directors’ loans

For the reasons given it is essential to keep track of any directors’ loans – money withdrawn from the company that is not a salary, dividend, or business expense repayment or a loan made by a director to the company – in a directors’ loan account (DLA). In any event this fits with the requirement for a company to keep proper accounting records.

The status of directors’ loans (or shareholder loans) should also be considered prior to the company year-end to see whether loans can be repaid and Section 455 tax mitigated.

Tax reporting obligations must be carefully monitored, including the obligation to report directors’ loans on form P11d (return of benefits in kind) and on self-assessment tax returns unless interest is paid at the official rate or the loan is less than £10,000. These requirements apply even if the loan is repaid prior to the company year-end.

Please seek assistance from your usual Kirk Newsholme contact if you are in any way uncertain about how the requirements relating to director or shareholder loans may affect you.

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