Editor | 16 August 2021
What is a Director’s loan account and what are the tax implications?

What is a Director’s loan account and what are the tax implications?

Directors can borrow money from their business as long as it is in line with the company’s articles of association, the 2006 Companies Act and - for large loans - approved by a shareholder’s vote. 

However, the implications of taking out a Director’s loan can be complicated, especially if borrowed money isn’t repaid promptly.

A Director's overdrawn current account that is not repaid will be treated as an outstanding loan, which can lead to complications for the Director and the company. Tax implications of an overdrawn Director’s account include:

  • The company will be subject to an s455 tax charge on the outstanding loan
  • If the loan is interest free and exceeds £10,000, the Director will need to pay a benefit in kind tax. The loan will also need to be reported to HMRC on a P11D form.

Under section 455 of the Corporation Tax Act 2010, tax is payable on a loan from a close company to one of its participators when the loan is left outstanding for more than nine months. A participator is any person who has a share or interest in the company - usually a shareholder.

For loans made after 6 April 2016, Section 455 tax is payable at 32.5% on outstanding loans. For loans made before 6 April 2016, the tax is 25%.

Previously, a company could avoid a Section 455 charge if a Director repaid the loan balance and borrowed a similar amount again shortly afterwards in a practice known as ‘bed and breakfasting’. Now, however, anti-bed and breakfasting rules are in place to prevent this.

Can you write off an overdrawn Director’s loan? 

When a Close company writes off or releases a loan made to a Director that is a participator, the amount released is treated as a distribution. This will apply to any loans made and written off to Directors and their families.

If a Director is not a participator in the company, the amount is taxable as employment income.

Written off Director loans can have a number of different tax consequences depending on circumstances. If you want to write off a Director loan, you should contact a tax advisor like Cloud Accountant for more information. 

HMRC investigation

If HMRC conducts a tax investigation into a company or Director, investigators may examine a Director’s private expenditure as part of an inquiry into a close company’s books.

For more information about a Director’s loan account or an associated tax investigation, speak to a member of the team today. Call: 0808 281 0303.