We deal with many Limited Companies and frequently find that the director(s) have an overdrawn ‘loan account’.
The definition of a ‘Directors Loan Account’ is the running of an account, documenting all monies either introduced by the director or monies withdrawn by the director
If a company pays for a directors personal expenses, and these do not form part of his or her remuneration, they are not really company expenses, so should not be claimed in the company’s accounts for tax purposes. The usual approach is for them to be shown against the director/shareholder’s ‘loan account’. Meaning that the running balance of the account could be in credit, if for example, the director has introduced funds to help with the company’s working capital, or it could be in an ‘overdrawn’ state because the director has used more company funds for personal expenses than he has introduced overall.
Positive loan account
When there is a net balance owing to the director, there are few tax implications. It is okay for the director/shareholder to charge interest to the company (HMRC could, however, challenge charges that are not commercially justifiable), this may be a chance to make tax-efficient use of the new savings allowance, which is up to £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, please note – this is fully withdrawn for those who are exposed to the additional rate.
Negative loan account
If the ‘Loan Account’ is overdrawn because the director owes money to the company, there are some issues for which the company is responsible: if the account is still outstanding more than nine months and a day after the chargeable period , it has to pay over 32.5% of the money lent to the individual. This is the ‘loans to participators’ regime that applies to ‘shareholders’ in ‘close’ companies, (almost all owner managed/family companies are ‘close’). While there is a de minimus threshold for loans below £15,000, in practice it is highly unlikely to apply to director/shareholders of their own company, and
Where a company does not charge interest on a loan to the director or to any employee, or where the interest charged is less than what is deemed to be a commercial rate (currently 2.5%)the interest that ‘should’ have been charged is assessable on the employee as a benefit in kind. There is a de minimus threshold of £10,000, but it is not as generous as many people think; the loan has only to exceed £10,000 at any time in the tax year for the tax charge to be triggered, so it is not a simple case of ensuring that the opening and closing balances are under the £10,000 limit. However, the effective tax on a £10,000 loan to a higher rate taxpayer is only £1,000 per full tax year of the loan.
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