Directors' loans - a reminder of the tax charge

Newsletter issue - December 2020

Cash transactions between a director and a personal or family company are recorded through the director's account. At the end of an accounting period, if the director owes the company money (ie the account is considered overdrawn), and the company is close (broadly, one that is controlled by five or fewer shareholders (participators)), there will be tax consequences to consider.

The s 455 charge

A tax charge will arise under the Corporation Tax Act 2009, s 455 where a director's loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. The tax charge is the liability of the company and is calculated as 32.5% of the amount of the loan. The rate of the charge is equivalent to the higher dividend rate.

Example

Lisa is the sole director of her personal company L Ltd. The company's financial year end is 31 March.

On 31 March 2021, Lisa's loan account is overdrawn by £20,000 and it remains overdrawn by this amount on 1 January 2022 (the date on which corporation tax for the period is due). The company must pay a tax charge under s 455 of £6,500 (£20,000 @ 32.5%).

Avoid the charge

Even if the loan account was overdrawn at the end of the accounting period, the section 455 charge can be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the period. This can be done in various ways:

It should be noted however, that with the exception of the director introducing funds into the company, the other options will trigger their own tax bills.

Two further points are also worth highlighting here:

It should also be noted that anti-avoidance rules apply to prevent the director clearing a loan shortly before the section 455 trigger date, only to re-borrow the funds shortly thereafter.

 

 

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