As a director, you may have taken out a loan from your own company for personal use. This is known as a director loan and can be a convenient way to access funds. However, it is important to be aware of the potential tax implications ...
There are a number of ways to create breathing space for your director loan!
Under section 455 of the UK's Corporation Tax Act, if a director's loan is outstanding nine months after the company's year-end, the company must pay a tax charge of 33.75% on the loan's value. This is known as a s455 charge and can significantly impact the company's finances.
"But there are ways to create breathing space and avoid this tax penalty!"
One option is to repay the loan before the nine-month deadline. This may not always be feasible, especially if the loan was taken out for a large amount. However, if you are able to repay the loan, it will eliminate the need for a s455 charge.
Another option is to write off the loan. This means the company will no longer expect repayment from the director, and the loan will be treated as a distribution. While this may seem like a simple solution, it can have income tax implications for both the company and the director. Therefore, it is important to consult with a tax adviser before taking this step.
But what if you are unable to repay the loan or write it off? In this case, creating breathing space by changing the company's accounting period can be a useful strategy. By extending the accounting period, you can delay the deadline for the s455 charge and buy more time to repay the loan!
For example, if your company has a year-end of the 31st of December 2023 and the director loan remains outstanding on the 1st of October 2024, the s455 charge would be due. However, if you change the company's accounting period to end on the 31st of March 2024, the deadline for the s455 charge would be extended to the 1st of January 2025.
It is important to note that changing the accounting period can only be done once every five years. Therefore, it is crucial to carefully consider the timing of this change and consult with a tax adviser to ensure it is the best option for your company.
"In some cases, a director loan may be necessary and cannot be repaid or written off!"
In this situation, it is important to keep detailed records of the loan and its purpose. This will help to demonstrate to HMRC that the loan was taken out for legitimate business reasons and not for tax avoidance purposes.
Although a useful tool for company directors, it is important to understand the potential tax implications and how to create breathing space under s455. By carefully managing director loans and seeking professional advice, you can avoid tax penalties.
This will ensure the continued financial health of your company.
Until next time ...
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about director loans and how you can create more breathing space, it may be a great idea to give me a call on 01908 774323 and let's see how I can help you.
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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