Loans from the company to the owners

The lowest personal bank loan rates have doubled compared to 18 months ago, although they have recently stabilised. Presently, the most favourable interest rate for loans ranging from £7,000 to £25,000 stands at 5.9%.

However, there exists a financing option where a director or participant of a private limited company can borrow at 0% interest. Directly from their company (provided it has available funds). Naturally certain restrictions apply. However, such loans can incur relatively low annual tax expenses and prove valuable for short-term borrowing needs.

An often overlooked aspect is that company loans can be extended not only to directors but also to associates or participators. As outlined in HMRC’s Company Taxation Manual (CTM60150). This means loans can be provided to a director’s spouse, parent, grandparent ), child, grandchild (termed ‘remoter issue’), sibling, or partner. For the penal ‘loans to participators’ tax rules under CTA 2010, s 455, there must be a blood relationship for them to apply, for instance, there may be no tax implications for a brother-in-law provided his spouse isn’t a shareholder in the company, and he isn’t the spouse’s sibling.

To avoid falling under the section 455 tax rules, the loan must be repaid within nine months and one day after the company’s accounting year-end. Failure to do so will result in the company facing an additional tax charge equivalent to the dividend upper rate (39.35%). Absent this charge, a director could theoretically borrow from the company indefinitely without facing any tax implications.

If the company is liable, the tax payment will be reimbursed once the loan is repaid or written off. Typically, this refund is offset against the corporation tax bill (with no interest received). Approximately nine months and one day after the end of the accounting year in which the loan is settled. However, if no corporation tax is owed, it may take some time for HMRC to refund the cash.

If the loan remains outstanding and the borrower falls into the basic or higher rate tax bracket. It would be more cost-effective for the loan to be converted into a dividend. Taxed at rates of 8.75% or 33.75%. Rather than the company bearing the 39.35% charge. Conversely, if the director is an additional rate taxpayer (45%). It would be more economical for the company to incur the section 455 charge. As it would eventually be refunded upon repayment or write-off of the loan. Even when the section 455 charge has to be paid. The shareholder may still end up with more initial funds by opting for a loan rather than receiving additional salary or dividends. After all, the director would still have benefited from an interest-free or low-interest loan.