What do you do when you have an overdrawn director loan account?
Why do directors loan accounts exist?
Let us imagine that a property investor sets up a limited
company to buy residential properties. They may have a share capital of £100
(100 X £1 shares) and loans the company £25,000 for the deposit of a property.
This money can be repaid back to the director whenever they want and it will be
tax-free. This is rather commons sense given that the company owes the
directors money.
However, lets imagine that the property is revalued and an
additional £50,000 is released by the mortgage provider into the company bank
account. The directors decide to take
the money out of the bank account for personal reasons. The original loan owed
to them was £25,000 and this is repaid. However, now the directors owe the
company the excess £25,000 taken in the withdrawal.
Directors loan accounts outstanding at the year end and not repaid within 9 months
Where the company is lending you as a director money this
can be very expensive. We strongly advise that you have no money outstanding to
your limited company at the year end. If you have any outstanding directors
loan accounts then make sure it is paid back within nine months of the year
end.
If there is any loan outstanding at the year end but repaid in
full within 9 months there is NO tax to pay on the loan. However, if there is
an outstanding amount of money owed by the directors to the company then 32.5%
tax will be applied.
It does not matter how much money you owe the company. The
32.5% tax charge applies on all monies outstanding,
Directors loan account greater than £10,000
Any loans at any time which total more than £10,000 will
need to be recorded on your self assessment as a benefit in kind.
The cost of the benefit in kind is calculated at HMRC
official interest rate (circa 3% to 5%) of the total value of the loan as an
annual charge. This interest charge is added to your salary from your limited
company which could result in income tax for you. National insurance at the
rate of 13.8% will also be applied to your for your limited company.
This is 32.5% tax charged is refundable once the loan is
paid back however this is an additional corporation tax charge to your business
in the meantime.
How can you avoid an overdrawn directors loan account?
In the above example, we saw that the directors were
initially owed £25,000 by the company for the property deposit. However, the
property was refinanced and the directors took £50,000 lump sum for personal
reasons. This means that the directors owe the company the remaining £25,000.
This may be repaid in a number of ways:
Taking a wage and salary at the year-end, which will be
subject to the usual income tax and national insurance contributions for both
the employee and employer.
Taking dividends out of the company. Please remember that
£2,000 dividends may be taken tax-free by each shareholder. Please also note that you can only take
dividends out of a company provided that it made sufficient profits.
Write off the loan. If you write off the loan at the year end the written off value would be a benefit in kind. This would be subject to income tax for the director on their self assessment. The company would also pay 13.8% on the loan value written off
Disclaimer:
This guide was written specifically for Smart Accounting clients. Some of the information contained in this guide might not be applicable if you do not have a business managed by Smart Accounting. By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details are correct at time of writing.
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