Implications of taking a director's loan

Personal

In the 17/18 tax year, a loan of no more that £10,000 will have no implications for personal tax. However, should the total exceed £10,000 at any point it the tax year, then the whole loan will become a ‘benefit in kind’ for the whole tax year (not just the periods during which it exceeded £10,000).

Meaning of ‘Benefit in Kind’
HMRC deem that if interest were paid by you to the company at the official rate of interest - currently 3.0% - to the company then the loan will not be a benefit in kind. Should the interest paid to the company be less than the official rate (or zero), then HMRC will treat the difference as a benefit and tax it (subject to the provisions of the first paragraph).

Example 1

Say that you had an outstanding loan of £20,000 for the whole of the 17/18 tax year. The whole loan would potentially be a benefit in kind.

Scenario 1: You pay 3.0% interest on the loan
In this case the loan will not be a taxable benefit as you are paying the full ‘official’ rate.

Scenario 2: You pay 2.00% interest on the loan
In this case you are paying part of the interest but not as much as the official rate. You are therefore deemed to be receiving the 1.0% difference as a benefit. The benefit to you would therefore be £200 (1.0% of £20,000).

Scenario 3: You pay 0.00% interest on the loan
In this case you are paying no interest so you are deemed to be getting full benefit of the interest that you are not paying. Therefore the benefit to you would be £600 (3.0% of £20,000).

Changes in the amount of the loan throughout the year should the amount vary over the year then there are two methods of determining the total interest which would be due at the official rate, these are:

‘The averaging method’
You will find further details under Section 182 Income Tax (Pensions and Earnings Act) 2003.

‘The alternative method’
You will find further details under Section 183 Income Tax (Pensions and Earnings Act) 2003. For the relevant legislation, see http://www.legislation.gov.uk/ukpga/2003/1/part/3/chapter/7
Bearing in mind all the above, it is a good idea to never allow your loan to exceed £10,000.

Company

For the company, what matters is how much is outstanding at the time that the corporation tax is due for the year in which the loan was taken out. Should the loan be outstanding at the this time then there will be a charge equivalent to 32.5%. (This is under Section 455 Corporation Tax Act 2010).

As an example, say that you take out a £15,000 loan in the company year 1st May 2017 to 31st April 2018. Your corporation tax for the year will be due by 1st January 2019. Should the loan be outstanding at this point it will be subject to the 32.5% tax (i.e. there would be a charge of £4,875).  You would however be able to reclaim this money should you repay the loan at a later date.

Please note that the £10,000 threshold for personal tax is not relevant to the company – any outstanding loan, no matter how small, would be subject to this charge.

31 day rule (Section 464C Corporation Tax Act 2010)
Should you pay off the loan (of £5,000 or more) and take out a new one within 30 days either side of the repayment, then HMRC will treat the new loan as having been paid off, not the original. This is significant if the new loan is taken in a subsequent company year to the original loan as it could mean that instead of the original loan being paid as intended (so as to avoid the S455 charge), you are deemed to have paid off the second loan in priority with the original loan still being outstanding. To avoid this you should ensure that there are at least 31 days between paying off the old loan and taking out a new one.

Example 2

Consider the following situation

· You have a company year running from 1st January to 31st December
· You take a loan of £10,000 on the 20th June 2017.
· You take a loan of £5,000 on the 15th January 2018.
· You wish to pay off £5,000 at some point

Scenario 1: You pay off the loan on 1st November 2017
You have paid off £5,000 of the original loan

Scenario 2: You pay off the loan on 20th December 2017
You have paid off the whole of the second loan – this is because although the repayment was made in 2017 and the second loan is during the second company year, there are less than 30 days between the two events so they are deemed to be linked.

Scenario 3: You pay off the loan on 10th February 2018
You have paid off the whole of the second loan – similar situation to scenario 2 – less than 30 days between the events so they are linked.

Scenario 4: You pay off the loan on 5th May 2018
Despite this being the latest repayment example, it is actually matched with the first loan as there are no loan being taken out within 30 days either side of the repayment. That said, if you allowed this to happen you would have allowed you directors loan to exceed £10,000 which would being about all the unfavourable personal tax consequences outlined earlier.

HMRC provide another example at http://www.hmrc.gov.uk/manuals/ctmanual/CTM61640.htm It is also important to bear in mind that an ‘intention’ or ‘arrangement’ to take out a new loan can complicate things so it is not a good idea to have a regular pattern of taking/repaying loans. This only applies if your loan exceeds £15,000 (not advisable). If you have any further questions or want further detail do let us know.

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