What Is Bed and Breakfasting?
When a director’s loan account (DLA) becomes overdrawn, the resulting tax exposure can be significant. In particular, the section 455 charge creates a strong incentive to clear an overdrawn loan before the statutory deadline of nine months and one day after the end of the company’s accounting period.
Where personal funds are not readily available, some directors consider repaying the loan temporarily just before the deadline and then taking new drawings shortly afterwards. This practice is commonly known as “bed and breakfasting” a director’s loan account.
HMRC is well aware of this strategy and has introduced specific anti-avoidance rules to counter it. These rules are strict, widely drawn, and often misunderstood. This article explains what bed and breakfasting is, how HMRC’s rules operate, and why attempted workarounds frequently fail.
What does “bed and breakfasting” mean in practice?
In the context of directors’ loan accounts, bed and breakfasting refers to a situation where a director:
- repays an overdrawn loan shortly before the section 455 deadline, and
- subsequently withdraws a similar amount from the company.
The intention is usually to:
- avoid the section 455 charge becoming payable, while
- continuing to use company funds personally.
From HMRC’s perspective, this undermines the purpose of section 455, which is to prevent directors from extracting value from companies without paying dividend tax. As a result, repayments that fall within the bed and breakfasting rules are ignored for tax purposes.
Why HMRC targets bed and breakfasting
Section 455 exists to stop directors using company loans as a long-term substitute for dividends. Without anti-avoidance rules, a director could simply:
- repay a loan briefly at the deadline, and
- borrow the money again shortly afterwards,
thereby avoiding both dividend tax and the section 455 charge indefinitely.
The bed and breakfasting rules ensure that only genuine, lasting repayments count. Temporary or circular transactions are treated as if they never happened.
The 30-day bed and breakfasting rule
The most well-known anti-avoidance provision is the 30-day rule.
Where a director:
- repays an overdrawn loan, and
- within 30 days borrows a broadly similar amount from the company,
the repayment is ignored for section 455 purposes. HMRC treats the transaction as if the original loan had never been repaid.
Key points to note
- The rule looks at substance, not accounting entries.
- The amounts do not need to be identical to be “broadly similar”.
- The repayment and redraw do not need to be formally linked.
If the rule applies, section 455 tax is calculated on the original outstanding loan balance.
The “arrangements” rule: wider than 30 days
Even where the 30-day rule is not technically breached, HMRC can still deny relief under the arrangements rule.
This applies where there is:
- an arrangement or understanding that the loan will be repaid and then re-borrowed, and
- no genuine intention for the repayment to be permanent.
Crucially:
- the redraw does not need to occur within 30 days, and
- the arrangement does not need to be written down or legally binding.
If HMRC can show that the repayment was made with the intention of borrowing again, the repayment will be ignored and section 455 will still apply.
Using third-party finance does not avoid the rules
A common misconception is that using a bank loan or other third-party finance to repay the company loan avoids bed and breakfasting.
It does not.
If a director:
- borrows externally to repay the company, and
- later borrows from the company to repay the external loan,
HMRC will still apply the arrangements rule if this was the plan from the outset. The temporary use of external funding does not change the substance of the transaction.
Worked example: bed and breakfasting caught by HMRC
Zack’s company has a year end of 28 February.
On 1 June 2024, Zack borrows £35,000 from the company, creating an overdrawn director’s loan account.
To avoid section 455 becoming payable, Zack:
- takes out a 90-day bank loan, and
- repays the company loan on 24 November 2025, shortly before the nine-month deadline.
As planned from the outset, Zack then:
- withdraws £35,000 from the company on 22 February 2026, and
- uses those funds to repay the bank loan.
Although the loan appears to have been repaid in time, HMRC would treat this as a pre-arranged cycle of borrowing. The repayment is ignored under the arrangements rule.
As a result, section 455 tax is payable on the full £35,000 at 33.75%, giving a corporation tax charge of £11,812.50.
Section 455 rates and upcoming increases
The section 455 charge mirrors the dividend upper rate.
- For loans made before 6 April 2026, the rate is 33.75%.
- For loans made on or after 6 April 2026, the rate increases to 35.75%.
This means that failed bed and breakfasting attempts will become even more expensive where loans are re-advanced after April 2026.
Bed and breakfasting risks during company sales
Bed and breakfasting issues often arise when a company sale is being planned.
Sellers may wish to:
- clear an overdrawn DLA to present a clean balance sheet, but
- avoid triggering dividend tax shortly before completion.
Temporary repayments using short-term finance are sometimes considered as a compromise. However, these are exactly the types of arrangements HMRC is targeting.
If section 455 becomes payable:
- the tax is paid by the company while still owned by the seller,
- the refund may only arise once the loan is finally cleared, and
- by then, the company may be owned by the buyer.
This can result in value leakage for the seller and unnecessary tension during negotiations.
What does not count as bed and breakfasting?
Not every repayment followed by a later loan is automatically caught.
The rules should not apply where:
- the repayment is genuine and intended to be permanent, and
- a later loan arises due to an unexpected change in circumstances, rather than any prior arrangement.
However, proving this can be difficult where timing is tight. HMRC will look closely at patterns of behaviour and funding flows.
Practical planning to avoid bed and breakfasting
The safest way to avoid the bed and breakfasting rules is simple in principle:
- ensure repayments are permanent, and
- avoid borrowing again from the company shortly afterwards.
In practice, better planning may involve:
- declaring dividends earlier in the accounting period,
- managing drawings more conservatively throughout the year,
- aligning loan advances with accounting periods to maximise repayment windows, or
- restructuring remuneration to reduce reliance on informal loans.
The key is early planning, not last-minute action close to statutory deadlines.
Key takeaway
Bed and breakfasting directors’ loan accounts is rarely effective and often expensive. HMRC’s anti-avoidance rules are deliberately broad and designed to catch temporary or circular repayments, even where third-party finance is used.
Directors who attempt to sidestep the section 455 deadline risk triggering the tax anyway—sometimes at a higher rate and with increased scrutiny.
How we can help
If your company has an overdrawn director’s loan account, or you are considering repayments close to a section 455 deadline, we can help you assess whether HMRC’s bed and breakfasting rules may apply. We can also help you plan genuine repayment strategies, dividend timing and cashflow management to avoid unnecessary tax charges. Please contact us to discuss your circumstances.
