Property Developers, Property Investors

Director loans

simon

Simon Misiewicz

24th November 2021

Director Loans

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The frequently asked questions about Director loan accounts

As property accountants, we are regularly asked about Director loans. We will look to answer the below questions in this Article.

“Am I paying too much income and corporation tax?”

“What are the basics of corporation tax and Director loan accounts?”

“When and how can I borrow from my company?”

“What is a Director loan account?”

“How much can I borrow in a Director’s loan?”

“When must a Director’s loan be repaid?”

“How is a Director’s loan taxed?”

“Do HMRC monitor Director’s loans?”

“Can I lend money to my company?”

Am I paying too much income and corporation tax?

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There are many reasons why people pay far more personal tax and business tax than they need to.

This is because:

– They do not know what they do not know.
– They have not spoken to a tax specialist to go through their situation to see what tax reliefs are available to them.
– Their accountants or solicitor are not aware of the many reliefs available to their clients and are not taken advantage of.
– Tax legislation changes but either the person or their accountant/tax specialist have not been made aware.

What are the basics of corporation tax and Director loan accounts?

As property accountants serving thousands of UK landlords that purchase buy to let properties, we know corporation tax and Director loan accounts can be complex and challenging areas to navigate.

Our focus is to assist our property investor clients in all of their business accountancy needs.

We know the best ways to ensure a tax-efficient relationship is maintained regarding both corporation tax and Director Loan Accounts (DLA) for all of our property investor clients.

The Companies Act 2006 relaxed the law on a company lending money to its Directors and dropped criminal penalties if the rules were broken.

Loans and similar transactions are permitted if shareholders give their approval.

A Director’s loan is when you or other family members get money from your company that is not a salary, dividend, expense repayment, or money you’ve previously loaned or paid into the company.

A Director’s loan is money that you borrow from your company and will eventually have to repay.

According to HMRC, you must keep a record of any money you borrow from or pay into the company.

This record is known as a Director’s Loan Account or DLA.

At the end of the company’s financial year, you must also include any money you owe the company or that the company owes you on the balance sheet of the annual accounts.

Another kind of Director’s loan is where a Director lends money to the company.

This could be to help with start-up costs or to provide additional revenue during a difficult cash-flow period.

The Director then becomes one of the company’s creditors.

Here are some of the most important things to remember regarding Director’s loans:

– Director’s loans must be repaid within nine months and one day of the company year-end.
– Borrow less than £10,000.
– If borrowing £10,000 or more, report it on your self-assessment tax return as a benefit-in-kind.
– Wait at least 30 days between taking out Director’s loans.
– If you lend to your company, ensure you and the company use the correct tax treatment.
– Do not allow your DLA to be overdrawn for long periods.

Director’s loans are a complex area and not to be taken lightly.

HMRC provides clear guidance on Director’s loans which is worth reviewing.

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When and how can I borrow from my company? 

Taking out a Director’s loan can give you access to more money than you receive via salary and/or dividends.

Director’s loans are often used to cover short-term to one-off expenses, including unexpected bills.

They do come with associated paperwork and legislation, as well as the potential for heavy tax penalties from HMRC.

Director’s loans should be kept in reserve as an emergency source of personal funds for Directors.

There are others ways to extract cash from a Limited company, and these should be reviewed.

If you are unsure whether to take out a Director’s loan, consult a tax specialist today.

What is a Director loan account?

A Director’s Loan Account (DLA) is where money borrowed or lent from your company is kept and recorded.

Shareholders and creditors can become concerned if a DLA is overdrawn for any period of time.

A DLA should be in credit or zero balance whenever possible.

If you take a Director’s loan from your company, there are detailed rules about the timings of repayments and any interest charged.

Items recorded in a DLA should include any cash withdrawals you make from the company as a Director and personal expenses paid with company money or a company credit card.

Business expenses can only be incurred for the business.

Anything you purchase using company resources that fails this test is classed by HMRC as a personal expense.

If you pay business expenses personally, you can pay yourself back using the company bank account.

Any other withdrawals made from your company bank account must be recorded in your DLA.

If a company has more than one Director, each Director must have their own DLA.

If your DLA remains in credit, the company owes you money, and you don’t have to pay tax.

If your DLA has a debit balance, it means it is overdrawn, and you owe the company money.

The balance is classed as an interest-free loan which may need to be reported to HMRC as a benefit in kind.

If you’re looking for professional tax advice regarding a Director’s Loan Account, speak to one of our team.

How much can I borrow in a Director's loan?

There is no legal limit to how much a director can borrow from their company.

It is worth considering how much the company can afford to lend you and how long the company can manage without that money.

Any loan of £10,000 or over will be treated as a benefit in kind by HMRC and must be reported on your self-assessment tax return.

You may also have to pay tax on the loan at the official rate of interest.

Any Director loans of £10,000 or more also need the approval of all the company shareholders.

If you consider taking out a Director’s loan, speak to one of our tax experts first.

When must a Director's loan be repaid? 

A Director’s loan must be repaid within nine months and one day of the company’s year-end.

If not, you will face a heavy tax penalty.

Any unpaid balance will be subject to a 32.5% corporation tax charge, called a Section 455 tax, or S455.

An S445 tax charge can be reclaimed once the Director’s loan is fully repaid, but it can be a lengthy process.

If you’ve taken longer than nine months and one day to repay your Director’s loan and have been charged corporation tax on the unpaid amount, you can claim this tax back nine months after the end of the accounting period in which you cleared the debt.

This is a long time to wait, and our advice would be not to put yourself in this position.

One way of avoiding this situation is to put off paying your company’s corporation tax until your Director’s loan is repaid.

Your corporation tax payment deadline is nine months after the company’s financial; year-end, which can give extra time to repay the loan.

You must wait for a minimum of 30 days between repaying one Director’s loan and taking out another.

Some Directors avoid corporation tax penalties of late repayment by paying off one director loan just before the nine-month deadline, only to take out a new one.

HMRC calls this practice ‘bed and breakfasting‘ and considers it to be tax avoidance.

Even sticking to the 30-day rule is not guaranteed to satisfy HMRC that tax avoidance isn’t occurring.

It is also possible to take out a Director’s loan by mistake if paying yourself an illegal Dividend.

As a company Director, you may choose to take most of your income in Dividends, as this can be more tax-efficient than a salary.

Dividends can only be paid out of profits, so if your company has not made a profit, no Dividends can be paid.

An illegal Dividend payment would be considered to be a Director’s loan and recorded in the DLA.

It would then need to be repaid within the nine-month deadline to avoid penalties being charged by HMRC.

To find out more about the rules around repayment of Director’s loans, contact our tax accountants.

How is a Director's loan taxed?

You may have to pay tax on Director’s loans.

Your company may also have to pay tax if you’re a shareholder as well as a Director.

Your personal and company tax responsibilities depend on whether the DLA is overdrawn (you owe the company) or in credit (the company owes you).

If you repay a Director’s loan in full within nine months and one day of the company’s year-end, you won’t owe any tax to HMRC.

Any overdue payment of a Director’s loan means your company will pay additional corporation tax at 32.5% on the outstanding amount.

This extra 32.5% is repayable by the company to HMRC when the loan is repaid to the company by the Director.

Another consideration of an overdrawn DLA is that the company has to pay employers National Insurance contributions at 13.8% of any benefit in kind. This includes a Director’s loan.

If you write off the DLA or leave it unpaid, you must pay personal tax on the loan through your Self-Assessment tax return.

This will be at the Dividend higher rate threshold of 32.5%.

If your company charges you interest below the official rate on an unpaid Director’s loan, this is recorded as company income and treated as a benefit in kind.

You would report the interest on a Self-Assessment tax return.

HMRC states that you may have to pay tax on the difference between the official rate and the rate you paid.

It is also worth noting that HMRC will not repay corporation tax until nine months and one day after the end of the corporation tax accounting period when the loan was repaid, written off or released.

This could have a significant impact on your company’s cash flow, so it is advisable to consider all options before taking a Director’s loan.

It is advisable to repay the loan within nine months of the end of the year-end accounting period.

Please speak to one of our tax advisers to get the best advice on taxation of Director’s loans.

Do HMRC monitor Director's loans? 

HMRC monitors Director’s loans, especially DLAs, which are regularly overdrawn through the company’s annual tax returns.

HMRC may decide that the money is not a loan but a salary and then charge Income Tax and National Insurance on the amount.

It is advisable to carefully monitor any Director’s withdrawals to ensure you don’t exceed the £10,000 threshold.

If too much money is borrowed and the company cannot pay its creditors, the company could be forced into liquidation.

The liquidator can then take legal action against the Director to collect the debt.

If you need help with your Director’s loan, get in touch with one of our tax accountants.

Can I lend money to my company? 

Lending money to your company as a Director may be an option if you want to invest money into your company to fund ongoing activities or buy assets.

Your company does not pay Corporation Tax on any money you lend it.

If you charge interest on a loan, it counts as both a business expense for your company and personal income for you.

You must also report this income on a Self-Assessment tax return.

Your company must pay you the interest less Income Tax at the basic rate of 20%, as well as reporting and paying the Income Tax every quarter using Form CT61.

Research carefully the rules when lending your company money.

 

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