Director’s Loans are a useful tool for businesses, where a Director borrows money from their own limited company, or a Director lends money to their company. However, a Director’s Loan is strictly regulated, and should only be used for short-term borrowing.
But, what can a Director’s Loan be used for? There are no rules as to what Director’s Loans can and cannot be used for, but when money is withdrawn from a company for reasons other than salaries, business expenses, and repaying loans, or is loaned to a business by a Director for start-up fees, and financial sustenance, that is considered a Director’s Loan.
Keep reading to learn more about Director’s Loans and how they can be used legitimately in a strictly regulated environment. We’ll also discuss how much can be borrowed, how long it can be borrowed for, and how Director’s Loans can be paid back.
- What Can a Director’s Loan Account Be Used For?
- How Much Can You Borrow with a Director’s Loan Account?
- How Long Can You Take a Director’s Loan For?
- Can a Director’s Loan be Written Off?
- Can I Re-Take Out a Director’s Loan?
What Can a Director’s Loan Account Be Used For?
Director’s Loans are strictly regulated and, but there are no rules on what they can and cannot be used for. However, they should only be used as a short-term loan when absolutely necessary as they can attract heavy taxes from HMRC if repayment terms do not follow strict rules.
Uses for a Director’s Loan – Borrowed by a Director
Directors can, in a pinch, borrow money from their own limited company for whatever reason they choose, other than to cover salaries, dividends, repaying business loans, and for business expenses. This may include:
- Paying back personal loans
- Paying school fees
- Home repairs and renovations
Paying back a Director’s Loan borrowed from the company can be a complex matter. It must be paid back in one of three ways; by dividends, by salary, or by cash.
Uses for a Director’s Loan – Loaned by a Director
Similarly, a limited company can borrow money from one of its directors as a short-term urgent loan. This may include:
- Business expenses
- Start-up fees
- To help sustain the business during times of financial difficulties
When a Director loans money to their business, that money can be claimed back tax-free at any point. Unlike when a Director borrows money from their company, it does not need to be paid back as salary or dividends. It can simply be withdrawn from the account, as long as it is properly documented. Any interest can be charged as a business expense.
How Much Can You Borrow with a Director’s Loan Account?
There is no limit to the amount that can be borrowed with a Director’s Loan. However, the Director, or the company must give suitable thought to how much they can afford to lend. Shareholders should also be contacted for larger loans to seek approval. It should also be taken into account that there are different tax rules on Directors’ Loans depending on how much is borrowed. Anything above £10,000 will be treated as a Benefit in Kind, which must be reported by Self-Assessment, and you may also have to pay tax on the loan at the official rate of interest.
How Long Can You Take a Director’s Loan For?
A Director’s Loan must be paid back within 9 months and 1 day of the company’s year-end to avoid a large tax penalty. Any unpaid Director’s Loans after this time are subject to a 32.5% corporate tax charge, although this can be claimed back once the loan is fully repaid.
However, claiming back this corporation tax can be a lengthy process as you are only eligible for this from 9 months after the end of the accounting period in which the loan was paid back in full. As such, it’s best to ensure that Directors’ Loans are paid back in full within 9 months of the year-end.
Can a Director’s Loan be Written Off?
A Director’s Loan given to a Director can be written off, but this must be formally waived and treated as a dividend under the Income Tax Act 2005. The amount written off must also be included in the Director’s Self-Assessment tax return, and similarly treated as a dividend.
However, when Director’s Loans that are written off are treated as dividends, HMRC may argue that writing off a loan comes under the definition of ‘emoluments from an office or employment and will seek to collect Class 1 NIC from the company.
Can I Re-Take Out a Director’s Loan?
In some cases, Directors or businesses may avoid repaying Directors’ Loans with a ‘Bed and Breakfast’ approach. This means paying the Director’s Loan back in full and on time, only to then take out another Director’s Loan immediately after.
This, however, cannot be done on loans over £10,000; a period of 30 days must pass before another Director’s Loan can be taken out, otherwise, HMRC will tax this as Business in Kind. Similarly, loans over £15000 taken out after this 30 day period may still attract tax.
It can be argued that HMRC has no way of proving the Bed and Breakfast approach, however, patterns of behaviour can be picked up if this approach is used frequently. As such it is better to not risk it and only use Director’s Loans legitimately, and as a last resort.
Tax Advice Southend
ARB Accountants provide valuable tax advice for businesses and individuals in Southend and across the UK. Our experienced Chartered Accountants are able to provide you with bespoke advice regarding your business taxes, including advice regarding Director’s Loans.
With us, you can be sure that your business is fully compliant with legislation, and that you’re making the most of the allowances and tax reliefs available to you.
Claim a free 60-minute consultation with our experienced Chartered Accountants to see how we can help.