Jefferies Newsletter July 2016

Don’t let your Directors Loan stay overdrawn

Directors often borrow from their companies and this incurs a temporary tax charge.

The rate of tax charged on loans to participators and other arrangements has been specifically linked to the dividend upper rate, which increased to 32.5% from 6 April 2016.

Section 455 CTA 2010 liabilities must be included in a company’s CT600 tax return. The S455 tax forms part of the calculation of tax payable by the company under Paragraph 8 Schedule 18 FA 1998.

The good news is that it’s a temporary tax charge and when the loan is repaid you can claim relief.

A claim to relief under Section 458 is a claim for relief against the original tax charge for the AP in which the loan was made. The time limit for the claim is four years from the end of the financial year in which the loan is repaid, released or written off. COM53120

The most common ways to clear directors loan are:

Dividends

Provided the company has distributable reserves – in other words the company has made a profit then you can declare dividends but watch out for dividend tax.

Repay the Debt

It may be worth borrowing money from an external source to repay the Directors Loan, the Bed & Breakfast rules say that the loan must be repaid for more than 30 days. But interest will be less than the 32.5% temporary tax.

Bonus

You could clear the loan by paying a bonus, this isn’t reliant on the company having distributable profit reserves.

Key Points

  • Directors loans must be repaid with 9 months to avoid a 32.5% tax charge
  • Loans over £10k are a benefit in kind

Download your copy of our July 2016 Newsletter here.