Loans to directors
A loan or guarantee must be approved by a resolution of the members of the company. A resolution giving the necessary approval can only be passed when a memorandum setting out required matters about the loan is made available to the members.
Information to be included in the memorandum:
The nature of the transaction
The amount of the loan and its purpose
The extent of the company's liability under any transaction connected with the loan
There are some exceptions to the requirement to gain member approval including loans where the aggregate value does not exceed £10,000, or where this relates to a credit transaction, if applicable, does not exceed £15,000 or is entered into in the ordinary course of the company's business.
Tax known as "Section 455 tax" under Corporation Tax Act 2010 is due on these director loans when the money has not been repaid in full to the company within nine months of the end of the accounting year in which the loan was made.
The basic rule is that s455 tax is due on the loan balance outstanding to the company 9 months after year-end, and this tax is also payable to HMRC 9 months after the year-end. The rate of this tax charge is the same as the higher rate of income tax on dividends at 33.75% for loans or arrangements taken out after April 2022.
When the director repays the loan to the company in full, the s455 tax will be fully refundable from HM Revenue & Customs (HMRC). s455 tax paid can be reclaimed 9 months following the end of the accounting period in which the loan was repaid and will be considered against the corporation tax due the following year. Depending on the timing of the repayment of the loan, it can take 2 or 3 years to reclaim this back from HMRC.
For example, a loan taken out in the year to 31 December 2023 and repaid on 1 January 2024 would fall in the accounting year to 31 December 2024 and would not be available for reclaiming until 9 months after the year-end - 1 October 2025. HMRC may in addition take several months to process this.
The bed and breakfast rule
To prevent directors from repaying loans and just taking them out again, HMRC has a 30 day "B&B" rule. HMRC will render the claim of a repayment of a director loan invalid if any new loans are taken out within 30 days of the one which was repaid. This means that a S455 tax charge will still apply if a director repays their loan after 9 months, but takes out another within the next 30 days.
An overdrawn director's loan account, which exceeds £10,000 at any time during a tax year (6 April to 5 April), will attract a benefit in kind charge on the individual director, as a beneficial loan unless you pay the deemed interest to your company. The interest payment to your company must be physically paid by 19th July after the end of the tax year.
The benefit received is deemed to be the interest that would have been paid, had the loan been received from a commercial lender.
The benefit is usually calculated by applying the HM Revenue & Customs official interest rate (2.25% for 2023/24) to the average value of the loan during the period it is outstanding, although in some cases taxpayers may wish to apply the precise method of calculating the benefit, by reference to the actual balance of the loan on every day it is outstanding. Please see the following link to HMRC's table of official rates for beneficial loans.
If the deemed interest is not paid to your company, the loan must be reported on the individual's P11D and Class 1A National Insurance Contributions (13.8% for 2023/24), calculated accordingly.
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