How do Directors Loans work?

[tomkinson]

How muh money in a Company year can be loaned to a Director (from the Company) without ant tax consequences? If the Company does not require this loan to be repaid can it be written off and if so how?

[Lambs]

T,

Strictly, such a loan would be unlawful, per the Companies Act 1985. It might also be 'ultra vires,' - i.e. forbidden - by the company's own Memorandum and Articles of Association.

This does not, however, mean that such loans don't occur. Quite the contrary. From an Income Tax perspective, a loan to a director would normally constitute a benefit in kind, to the extent that it is 'interest-free,' but loans where the balance is below £5,000 AT ALL TIMES THROUGHOUT THE TAX YEAR are usually ignored.

In fact, the law and practice relevant to such arrangements can become quite complicated, and beyond the scope of a simple answer that can be posted in the forum. As ever, your best approach is to seek professional advice directly, so that the full facts relevant to your own case can be properly considered.

Regards,

Lambs

[Lambs]

Sorry, in addition, there are consequences for the company:

Where a loan to a participator (generally, a shareholder in a small company) is made and remains unpaid more than 9 months after the end of the Accounting Period, (in which the loan is made), then a tax charge is levied on the company. This is quite separate to any charge made on the director/employee personally. It is (eventually!) repayable when (and to the extent that) the loan is repaid to the company.

If, however, the loan is basically written off, then it is deemed to be a dividend paid to that shareholder, at the date of writing off. The company's tax is again eventually repayable, but income tax will instead be charged on the shareholder, in respect of the so-called dividend.

As I recommended above, you should seek professional advice before considering loans - and again before they are waived.

Regards,

Lambs