Directors Loan - How to calculate interest on the loan.

[Robinlo]

Hi,
19 months ago, in the way of a Directors Loan I implanted £40,000 into a new company that I'm a director of along with a fellow partner.
In the last 19 months I have not drawn any Dividends or salary or remuneration from the company.
It is now time to call my loan back, but I need your help in calculating the interest on the £40,000 over this period of time.
Would the interest be calculated on a monthly bases, thus accumulating month on month?
Please advise?

[Craig@Clarity]

How you calculate the interest is up to you. It could be either a straight line flat percentage each month or compound.

One thing you need to be aware of is the reporting side of this. You need to apply to complete a CT61 which notifies HMRC that the interest payments it makes to you has deducted tax at basic rate from "relevant distributions". Basically, when your company pays you the interest, you must fill out a form CT61 once a quarter telling them how much interest and basic rate tax has been calculated. You then need to declare the interest on your personal tax return as this is income received personally.

Here's a link http://www.hmrc.gov.uk/ctsa/ct61-notes-2010.pdf

[Greg@CapitalCity]

Hi Robinlo,

Just another couple of points to add to Craigs comments - to help you consider tax relief;
(1) For company tax - assuming this is a close company, this makes you a connected party. Your company will only get tax relief on the interest expense if it is paid to you within 12 months following the end of its accounting period.
(2) For personal tax - assuming the money was lent wholly and exclusively for the purposes of the business of the company, you can claim tax relief on any loan interest you PAID if you needed to get a loan to lend to the company in the first instance. And you can't get tax relief on overdraft interest, or credit card interest.

[Scrag Meister]

Hi

Example at 4%, Compound Monthly, 30/360 basis, like a mortgage.

Total Interest Owed £2610.79.

All a very rough calc and your circumstances may be different.

IANAA etc.......

Date Payment Balance Interest
16/04/2010 0 40000.00
16/05/2010 1 40133.33 133.3300
16/06/2010 2 40267.11 133.7800
16/07/2010 3 40401.33 134.2200
16/08/2010 4 40536.01 134.6700
16/09/2010 5 40671.13 135.1200
16/10/2010 6 40806.70 135.5700
16/11/2010 7 40942.72 136.0200
16/12/2010 8 41079.19 136.4800
16/01/2011 9 41216.13 136.9300
16/02/2011 10 41353.51 137.3900
16/03/2011 11 41491.36 137.8500
16/04/2011 12 41629.66 138.3000
16/05/2011 13 41768.43 138.7700
16/06/2011 14 41907.66 139.2300
16/07/2011 15 42047.35 139.6900
16/08/2011 16 42187.51 140.1600
16/09/2011 17 42328.13 140.6300
16/10/2011 18 42469.22 141.0900
16/11/2011 19 42610.79 141.5600