Reply to: Overdrawn Directors Loan Account

[William01]

If you are a company director and take money out of your company that's not a salary or a dividend you are known to be having a director's loan.

[Wanderer]

Hypothetically, if I took a directors loan of say £20,000 for 3 years and paid the 4% interest to my company (1600 per annum), what would the implications be? I presume after a year, it would have to be classed as salary? Just wondering as I have some debts where the interest rate is around 16% average so the 4% would save me some cash.

The problem is the 3 years... If you can pay it back before the end of 9 months after your company's tax year end then you don't get hit with the 25% charge.

You can't take out back to back loans where you pay it off one day and take out a new director's loan the next ("bed and breakfasting") either .

[pmeswani]

And on the other side of the coin HMRC will also repay you interest at 0.5% if you pay early - small beans maybe, but better than many banks are paying at the moment.

I refer to the answer I gave some moments / time ago. HMRC can do it because they can. They are a law upon themselves. They are only there to do themselves favours as well as favours to MP's.

[SneakySimon]

Thanks

Thanks Clare - not quite so much of a saving then!!

[Clare@InTouch]

Im sure this has been asked before but it is not jumping out and slapping me on the forum so I will ask anyway......

Hypothetically, if I took a directors loan of say £20,000 for 3 years and paid the 4% interest to my company (1600 per annum), what would the implications be? I presume after a year, it would have to be classed as salary?

Just wondering as I have some debts where the interest rate is around 16% average so the 4% would save me some cash.

The interest paid would ensure it's not treated as a benefit in kind. There would still be extra CT payable on the outstanding loan though - any loan outstanding 9 months after the company year end will be taxed at 25% of the value outstanding, payable along with your CT. This extra tax is repaid to the company when you repay the loan to the company.

[SneakySimon]

Dumb question time....

Im sure this has been asked before but it is not jumping out and slapping me on the forum so I will ask anyway......

Hypothetically, if I took a directors loan of say £20,000 for 3 years and paid the 4% interest to my company (1600 per annum), what would the implications be? I presume after a year, it would have to be classed as salary?

Just wondering as I have some debts where the interest rate is around 16% average so the 4% would save me some cash.

[Ignis Fatuus]

Tell me, where can you get an unsecured loan at an effective rate of 1% (or even 4% for that matter) regardless of your credit history?

The Bank of England (but only if you are a bank).

[Wanderer]

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.

The OP's wife can't take the money herself but the director of the company can loan the company's money to anyone they like.

There are special rules for "loans to participators" though and this would include the director's spouse. From what I can see, you can loan the money to your spouse, they pay it back before the company year end at the official rate of interest (currently 4%) and there is no benefit in kind and no tax to pay. The 4% interest becomes company income on which the company pays tax at 20% leaving a net interest rate on the loan of 1%. A good, safe investment for the company with a good return. I can't see that there is a problem here. However there is one thing to make clear: you have to be able to get the money back, writing off the loan or not paying it back on time will potentially leave the company with a big tax charge. With anything like this, professional advice is needed.

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

Tell me, where can you get an unsecured loan at an effective rate of 1% (or even 4% for that matter) regardless of your credit history?

[Scrag Meister]

I got a check for the grand total of £42 a couple of weeks back for paying last years CT early.

[Clare@InTouch]

Yes... because they can. If you don't like it, don't do it.

And on the other side of the coin HMRC will also repay you interest at 0.5% if you pay early - small beans maybe, but better than many banks are paying at the moment.

[pmeswani]

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

Yes... because they can. If you don't like it, don't do it.

[Ignis Fatuus]

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

[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

[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

[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.