Overdrawn Directors Loan Account

[maverick18]

Hi All,

I've been reading about DLA in the forums and realise that its not advisable to have DLA over £5k 'at any point'.

My Company formation was in Oct 2010, which means the accouting year end is Oct 2011.

I currently have drawn over £5k thru DLA.

Would I have to worry about BIK and tax implications if i repay the entire amount before Oct 2011?

Am I correct in presuming that if I repaid the entire Directors Loan (which is above £5k right now) before Oct 2011, I would not have to worry about any BIK or tax issues?

[Nixon Williams]

Hi All,

I've been reading about DLA in the forums and realise that its not advisable to have DLA over £5k 'at any point'.

My Company formation was in Oct 2010, which means the accouting year end is Oct 2011.

I currently have drawn over £5k thru DLA.

Would I have to worry about BIK and tax implications if i repay the entire amount before Oct 2011?

Am I correct in presuming that if I repaid the entire Directors Loan (which is above £5k right now) before Oct 2011, I would not have to worry about any BIK or tax issues?

You should note that a loan is only allowed under the Companies Act 2006, if there is prior shareholder approval
(approval is not required if the loan(s) does not exceed £10,000).

Tax Consequences
There are two main areas that need to be considered when thinking about a director’s loan and they are the personal
tax position (P11d) and the company tax position (section 455 CTA2010).

Personal Tax Complications:
Any loan that exceeds £5,000 at any point during the year (even if just by a penny) must be declared on the P11d each
tax year in which the loan is outstanding.

The benefit in kind arises if the loan is a ‘beneficial loan’ i.e. the interest charged on the loan is below the official
interest rate as set by HMRC (currently 4.0% for 2010/11).

The benefit in kind value is equivalent to the official rate of
interest on the loan less any interest paid by the employee (or director) to the company during the year.

The tax payable by the recipient of the loan will be at their marginal rate i.e. 20/40/50% on the benefit in kind value
once calculated on the P11d and the company will also pay class 1a national insurance on this value.

Company Tax Complications:
Any loan that is outstanding at the company’s yearend is subject to a corporation tax surcharge under section 455 of
the Corporation Tax Act 2010 (section 455 CTA2010). The surcharge value is calculated as 25% of the outstanding loan
at the yearend and is payable with the corporation tax at the normal due date.

However, if part or all of the loan is repaid within 9 months of the yearend then the surcharge charged is reduced by
25% of the repaid amount and as such, if the whole loan is repaid within 9 months of the yearend there will be no
surcharge applied.

The surcharge is repayable by HMRC but only at a point when the director’s loan has been cleared. In this case, any monies paid under the surcharge will be repaid to the company 9 months after the end of the accounting period in which the loan is repaid.

Our general advice is to avoid director loans as it is too easy to make a costly error.

I hope this is not too long, but I think it covers all the areas!

Alan

[Craig@Clarity]

Hi All,

I've been reading about DLA in the forums and realise that its not advisable to have DLA over £5k 'at any point'.

My Company formation was in Oct 2010, which means the accouting year end is Oct 2011.

I currently have drawn over £5k thru DLA.

Would I have to worry about BIK and tax implications if i repay the entire amount before Oct 2011?

Am I correct in presuming that if I repaid the entire Directors Loan (which is above £5k right now) before Oct 2011, I would not have to worry about any BIK or tax issues?

If the loan goes over £5k at any point in time, you'll have a BIK issue unless you pay your company interest on the loan at the current interest rate. This will remove the BIK charge.

If you repay the loan back before Oct 11, the company will not incur any extra tax (under section 455).

[maverick18]

If the loan goes over £5k at any point in time, you'll have a BIK issue unless you pay your company interest on the loan at the current interest rate. This will remove the BIK charge.

If you repay the loan back before Oct 11, the company will not incur any extra tax (under section 455).

Thank you both Alan and Craig

[maverick18]

Curious to know .. does one have to pay 4% interest on the loan amount over £5k or the entire loan amount?

eg. if the total loan availed is £15k, is the 4% interest applicable on £10k or entire loan amount of £15k?

Thanks!

[Wanderer]

eg. if the total loan availed is £15k, is the 4% interest applicable on £10k or entire loan amount of £15k?

And if I take a loan of £10k and pay it back before the company year end with 4% interest, do I have to declare the loan to HMRC anywhere? ie, will they ever know that I took it (short of investigating me)?

[Craig@Clarity]

You'll have to pay interest on the full loan and not just the amount over £15k. You'll also have to make good the interest on any balances below the £5k limit in the tax year. Going over the £5k limit brings any overdrawn loan account balance into play in the tax year.

You'll also have to declare the loan on the P11D but you have the chance to enter how much interest was paid on the loan.

[portseven]

You'll have to pay interest on the full loan and not just the amount over £15k. You'll also have to make good the interest on any balances below the £5k limit in the tax year. Going over the £5k limit brings any overdrawn loan account balance into play in the tax year.

You'll also have to declare the loan on the P11D but you have the chance to enter how much interest was paid on the loan.

Is the 5k limit per person or per Ltd co

So for example myself and wife who is a shareholder each take 5k each

[SueEllen]

Is the 5k limit per person or per Ltd co

So for example myself and wife who is a shareholder each take 5k each

The hint is in the title - Director's Loan. So if you wife isn't a Director she shouldn't have her hands in the company till.

FYI - What is a director's loan account? | Business Link

[Ignis Fatuus]

Is it justified for HMRC to set their rate at 4% when the BofE has it at 0.5%?