The opportunity to borrow funds from a personal or family company can provide an attractive source of cheap finance. In a family or personal company, transactions between the company and the individual directors are commonplace. A director's loan account is a simple mechanism for recording the transactions that take place. If the company is a close company and the director's account is overdrawn at the end of the tax year, tax consequences may arise.
What is a close company?
- A close company is broadly a UK resident private company which is controlled by five or fewer participators.
- A participator is an individual with an interest in a company's share capital or voting rights: such as a shareholder or a director, and in some cases loan creditors but trade creditor and commercial lenders are excluded.
See detailed definitions of "close company" and "participator".
It is possible to borrow up to £10,000 for up to 21 months without any associated tax consequences. However, if the director's account is overdrawn at the end of the accounting year, there may be tax consequences for the company if it is a close company. Further if the loan exceeds £10,000 at any point in the tax year, a benefit-in-kind tax charge will arise.
Overdrawn and credit accounts
If the director's account is overdrawn, the director is regarded as having a loan from the company. This may simply be because the company has lent money to the director, but it may also arise for other reasons, for example if the company has paid personal bills on behalf of the director.
Where the director has lent the company money, the company may pay interest on the loan balance.
Contact SIL Solutions (Tax advisers with a difference)
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