Change of directors

[mikef]

My wife has been the director of our company (a startup with lots of costs -dev costs - and little income).
I was not a director as I was not permitted to hold such a position by my permanent employment.
Now I'm switching to contracting, so I plan to become the director of the company (sole director, so my wife will resign, as she will not be doing substantial work for the company going forward). I will also plan to stay outside IR35 on my contract.

Will this create a problem for the Director loan account - the director (my wife) has put about 10K in the company to support the company, development costs, etc.?
We share a common account, so taking money out of the company should not be a problem, but just wanted to check what happens to the director loan account when directors change. In this case, the directors are married to each other.

Can I just go ahead and make the change @Companies House & HMRC? Or are there any gotchas I have to watch out for?

Many thanks,
Mike

[ASB]

I am assuming that the company is broadly solvent and that the directors loan account is in credit.

In normal terms, with the absence of any agreement to the contrary she would just become a creditor and the loan can be repaid as and when (or on demand if she demands it). The company can legitimately refuse if repayment were to make it insolvent. Then it can get messy.

If solvency is an issue then it is conceivable that she may be able to write it off and get tax relief - though it depends on the exact circumstance (I wouldn't bank on being to do this).

Some reading.

Can directors get their loans back after they resign or are dismissed?
Directors Loan Repayment / Transfer of Shares / Resignation | AccountingWEB

[TheCyclingProgrammer]

A "directors loan" is actually just a way of describing a "loan to participator" where the participator happens to be a company director. Loans can be made to participators, which can include shareholders, and also associates of participators, which includes relatives or partners of a participator. They are all treated the same.

Likewise, anybody can loan your company money and they will just be a creditor.

Which means, you can become a director and your wife can resign and her loan account will remain active - it just won't be a "directors loan" anymore. The usual rules regarding BIK limits/interest rates/s455 tax will still apply if her loan account becomes overdrawn.

In this case, your wife's loan is in credit so your company can simply repay her as and when it has available post-tax funds to do so.

[northernladuk]

Why don't you have an accountant?

[TheFaQQer]

Why do you want her to resign as a director?

[SueEllen]

Why do you want her to resign as a director?

He thinks it would be easier to have a sole director for some reason.

However as they are married they can have two directors, and one or more shareholders.

[mikef]

I don't want IR35 complications, which is why I would think having her as an additional director and/or shareholder might trigger an HRMC investigation, given that going forward she won't be doing something meaningful for/on the company. It might seen as a way of extract funds out of the company without paying tax. I know having your wife as a secretary was a big punt a while ago, but don't think that works very well nowadays. I might be wrong.
She also has a permanent job.

[mikef]

In this case, your wife's loan is in credit so your company can simply repay her as and when it has available post-tax funds to do so.

Post-tax? I thought paying back loans (director loans included) can be done with pre-tax funds?
In this case, the company is not making a profit, so no tax to pay, but as soon as I start contracting, it'll make a profit - after paying back the loans (money my wife and I put into the company so far).

[SueEllen]

I don't want IR35 complications, which is why I would think having her as an additional director and/or shareholder might trigger an HRMC investigation, given that going forward she won't be doing something meaningful for/on the company. It might seen as a way of extract funds out of the company without paying tax. I know having your wife as a secretary was a big punt a while ago, but don't think that works very well nowadays. I might be wrong.
She also has a permanent job.

Having 2 directors has absolutely nothing to do with IR35.

You are also confusing the role of directors and shareholders.

She can be a director without being a shareholder and she also doesn't have to be a signatory to any accounts. Having a additional director can have it's advantages especially if something happens to you.

It's actually your wife who may not want to be the director of your company because if you screw things up she can be liable.

[TheCyclingProgrammer]

Post-tax? I thought paying back loans (director loans included) can be done with pre-tax funds?

There's no personal tax implications of repaying a director's loan but a company needs to be able to pay its liabilities and I'd suggest you'd want to prioritise paying HMRC any VAT or Corporation Tax you owe it before it re-pays any loans. Loan repayments are not a tax deductible expense for the company (although any interest charged might be). They come out of post-tax reserves.

Simple example: if you have a net profit of £10k before tax, you would have a £2k CT bill and would have £8k remaining from which you could re-pay the loan. You could re-pay the loan anyway but you'd still have a £2k tax bill.