Director's Loan

[HoofHearted]

Interest free director loans are deemed a BIK if the total balance exceeds £10k and you will have to pay national insurance contributions - the simplest way to avoid this is either a) keep the balance below or equal to £10k or b) pay interest at the prescribed HMRC rates (which will be taxable income to YourCo).

...

TLDR; keep your DLA balance below or equal to £10k, repay any outstanding amounts within 9 months and don't worry about charging interest.

FTFY. AIUI, IANAA, etc.

[TheCyclingProgrammer]

1 - Any loan(s) under not exceeding £10,000 in the total amount borrowed from the company do not require interest as long as the full amount is repaid to the company less than 9 months after the company year end in which the loan was taken.

A couple of posts conflating two different things here...there are two main issues with overdrawn DLAs - interest on beneficial loans and the s455 tax charge. The rules for each are distinct.

Interest free director loans are deemed a BIK if the total balance exceeds £10k and you will have to pay national insurance contributions - the simplest way to avoid this is either a) keep the balance below £10k or b) pay interest at the prescribed HMRC rates (which will be taxable income to YourCo).

The s455 tax charge is payable on *any* overdrawn loan balance that is still overdrawn 9 months after the end of a company's financial year. Any overdrawn amounts will be reported on your company accounts. Therefore it is important that all overdrawn amounts at the end of the accounting period are repaid within this time. The charge is temporary and you will get it back eventually once the loan is re-paid but it can obviously cause a cashflow issue so best avoided if possible.

Finally you need to be aware of the bed and breakfasting rules regarding the repayment of overdrawn director loans - these rules are in place to prevent people from avoiding the s455 charge. In brief, for loan balances below £15k any subsequent loan taken within 30 days of repaying the overdrawn balance will be treated as part of the same loan, so you should be careful about repaying the loan then taking it again. For loan balances *over* £15k, the 30 day rule is disregarded - HMRC can deem any subsequent loan as an extension of a previous loan if they believe it was taken solely to avoid the s455 charge.

TLDR; keep your DLA balance below £10k, repay any outstanding amounts within 9 months and don't worry about charging interest.

[HoofHearted]

1 - Any loan not exceeding £10,000 does not require interest as long as the full amount is repaid to the company less than 9 months after the company year end in which the loan was taken.

FTFY (<= rather than <). AIUI, IANAA, etc.

[oilboil]

I've never personally used a Director's Loan so this is from theory not experience.

It is my understanding that whilst a DL repaid within 9 months of the company year end doesn't need to incur interest it still needs to be declared in the annual accounts

Something like "In the year these accounts cover £9,000 was loaned to Director X, at the time these accounts were prepared the loan amount outstanding was £0"

I might be wrong...

[NowPermOutsideUK]

I spend a lot of time on bailli - Just out of coincidence this ruling was published in Oct 2020

Very relevant to what happens if you have a loan and the company sinks - Moral of the story is document your dividends and be extra careful

BM Electrical Solutions Ltd & Anor v Belcher [2020] EWHC 2749 (Ch) (14 October 2020)

[wattaj]

1) My company accounting year end is Aug. Now in Oct I will take £9000 director's loan, pay 2.5% interest on it and pay back in Mar 2021. - From reading other posts, I myself or the LTD company don't need to declare it anywhere - Is this right?

2) When I take the loan is there any admin process within the LTD company I need to follow? meaning how to record it?

3) While transferring the money out of the company bank account, do I just mention a reference "Director's loan"? - Just to ensure it's tagged properly in HMRC's eyes?

4) If I repay the loan in a few month's time, I only pay the interest for the period in question, not for the entire year? right?

5) Do I need to keep paying interest every month? or ok to pay along with the loan repay?

6) Is 2.5% interest rate OK? (read on HMRC website but double checking)

1 - Any loan(s) under not exceeding £10,000 in the total amount borrowed from the company do not require interest as long as the full amount is repaid to the company less than 9 months after the company year end in which the loan was taken.

2 - No, not really. Just transfer the money and record it as a transfer into a directors loan account in your accounting software.

3 - Yes, I do; others may not. Your call.

4 - No interest is required if the loan is fully paid back before the time limit for beneficial loans. Read up about S455.

5 - Christ....

6 - Find the "official rate" for the current tax year on the HRMC website.

[Geekman]

If you are needing to ask a bunch of strangers 6 questions (which are mostly wrong) I'd say you need to start at square one and spend some time discussing it with your accountant.

Appreciate your view but unfortunately my accountants are incompetent. Only realized after joining them. Want to fire them but may not be worth if Clients stop Limited company contracts in a few months. Still thinking.... and hence wanted to get opinion from Pros on such a critical subject.

Hope you understand.

Many thanks!

[northernladuk]

DLs aren't complicated but can be very expensive if you get them wrong. They are also very well documented and explained on here and on the Web.
If you are needing to ask a bunch of strangers 6 questions (which are mostly wrong) I'd say you need to start at square one and spend some time discussing it with your accountant.

[Amanensia]

Keep the loan no more than £10k, and pay it back within nine months of the company year end in which it was made.

Do this and there's no need to charge any interest, no liability to any tax and no BIK issue.

[Geekman]

Dear all,

I've read all the posts on this forum regarding this. But would appreciate a very quick confirmation from you on my understanding so I don't get it wrong

1) My company accounting year end is Aug. Now in Oct I will take £9000 director's loan, pay 2.5% interest on it and pay back in Mar 2021. - From reading other posts, I myself or the LTD company don't need to declare it anywhere - Is this right?

2) When I take the loan is there any admin process within the LTD company I need to follow? meaning how to record it?

3) While transferring the money out of the company bank account, do I just mention a reference "Director's loan"? - Just to ensure it's tagged properly in HMRC's eyes?

4) If I repay the loan in a few month's time, I only pay the interest for the period in question, not for the entire year? right?

5) Do I need to keep paying interest every month? or ok to pay along with the loan repay?

6) Is 2.5% interest rate OK? (read on HMRC website but double checking)

Many thanks in advance for your help.

Regards,
Geekman