Director's Loan Question

[Bristol_Cliff]

I've been a regular reader of UKBF for some time, I see "Director Loan" appearing quite frequently in the insolvency section. Main because the OP has the need to payback the directors loan.

I run a small electrician business and growing the company to myself and 3 sparks and an apprentice. A couple of years ago I LOANED the company £15,000 to be able to grow, our old accountant put it down under the director's loan account.
Which meant to had a negative figure of £14k (ish).
Our old account decided to retire (he wasn't a fan of this HMRC online stuff) so we got a new accountant.
He prepared our accounts without any issues. However, I noticed on our accounts we have the original - £14k and another directors loan account with +£5,000.

I asked him about it and he said that the loan should have been made in shares not on the directors loan account.

I'm not sure which accountant was / is right. Also I afraid if I needed to liquate the company (not intending to) I'd lose my £15k (as expected) BUT also have to pay the £5k back.

Thanks in advance.

Cliff

 

[Newchodge]

I think you either need to get your new accountant to explain in great detail what they have done and why, or just get a new accountant.

 

[Ian J]

I noticed on our accounts we have the original - £14k and another directors loan account with +£5,000.

I asked him about it and he said that the loan should have been made in shares not on the directors loan account.

The original loan should have been whatever you wanted it to be whether loan or shares. Most of us would have probably done what you did and make it a loan in the hope that it could eventually be repaid when the company was in a position to do so

 

[Newchodge]

To elaborate on my erlier answer. It doesn't matter who was 'right', whether it should have been a loan or shares. What matters is that your new accountant has made a fundamental change to your business finance without consulting you. and that is something up with which you should not put!

 

[MyAccountantOnline]

@Bristol_Cliff do you have £5,000 of shares in the company which you haven't paid for?

 

[US_US_Taxes]

Let us imagine that a property investor sets up a limited company to buy residential properties. They may have a share capital of £100 (100 X £1 shares) and loans the company £25,000 for the deposit of a property. This money can be repaid back to the director whenever they want and it will be tax-free. This is rather commons sense given that the company owes the directors money.

However, let us imagine that the property is revalued and an additional £50,000 is released by the mortgage provider into the company bank account. The directors decide to take the money out of the bank account for personal reasons. The original loan owed to them was £25,000 and this is repaid. However, now the directors owe the company the excess £25,000 taken in the withdrawal.

Directors loan accounts outstanding at the year end and not repaid within 9 months
Where the company is lending you as a director money this can be very expensive. We strongly advise that you have no money outstanding to your limited company at the year-end. If you have any outstanding directors loan accounts then make sure it is paid back within nine months of the year-end.

If there is any loan outstanding at the year end but repaid in full within 9 months there is NO tax to pay on the loan. However, if there is an outstanding amount of money owed by the directors to the company then 32.5% higher rate of tax will be applied.

It does not matter how much money you owe to the company. The 32.5% tax charge applies on all monies outstanding,

Download your property tax guide here, written by our property accountants
Directors loan account greater than £10,000
Any loans at any time which total more than £10,000 will need to be recorded on your self-assessment as a benefit in kind.

The cost of the benefit in kind is calculated at HMRC official interest rate (circa 3% to 5%) of the total value of the loan as an annual charge. This interest charge is added to your salary from your limited company which could result in income tax for you. National insurance at the rate of 13.8% will also be applied to your for your limited company.

This is 32.5% higher rate of tax charged is refundable once the loan is paid back however this is an additional corporation tax charge to your business in the meantime.

How can you avoid an overdrawn directors loan account?
In the above example, we saw that the directors were initially owed £25,000 by the company for the property deposit. However, the property was refinanced and the directors took £50,000 lump sum for personal reasons. This means that the directors owe the company the remaining £25,000.

This may be repaid in a number of ways:

• Taking a wage and salary at the year-end, which will be subject to the usual income tax and national insurance contributions for both the employee and employer.
• Taking dividends out of the company. Please remember that £2,000 dividends may be taken tax-free by each shareholder. Please also note that you can only take dividends out of a company provided that it made sufficient profits.
• Write off the loan. If you write off the loan at the year-end the written off value would be a benefit in kind. This would be subject to income tax for the director on their self-assessment. The company would also pay 13.8% on the loan value written off

 

[UK Contractor Accountant]

what is all that blarb about?

The OP asked why his loan had been effetively reduced by £5K which as @MyAccountantOnline points out is probably due to unpaid share capital now treated as paid up.

 

[Newchodge]

Let us imagine that a property investor sets up a limited company to buy residential properties. They may have a share capital of £100 (100 X £1 shares) and loans the company £25,000 for the deposit of a property. This money can be repaid back to the director whenever they want and it will be tax-free. This is rather commons sense given that the company owes the directors money.

However, let us imagine that the property is revalued and an additional £50,000 is released by the mortgage provider into the company bank account. The directors decide to take the money out of the bank account for personal reasons. The original loan owed to them was £25,000 and this is repaid. However, now the directors owe the company the excess £25,000 taken in the withdrawal.

Directors loan accounts outstanding at the year end and not repaid within 9 months
Where the company is lending you as a director money this can be very expensive. We strongly advise that you have no money outstanding to your limited company at the year-end. If you have any outstanding directors loan accounts then make sure it is paid back within nine months of the year-end.

If there is any loan outstanding at the year end but repaid in full within 9 months there is NO tax to pay on the loan. However, if there is an outstanding amount of money owed by the directors to the company then 32.5% higher rate of tax will be applied.

It does not matter how much money you owe to the company. The 32.5% tax charge applies on all monies outstanding,

Download your property tax guide here, written by our property accountants
Directors loan account greater than £10,000
Any loans at any time which total more than £10,000 will need to be recorded on your self-assessment as a benefit in kind.

The cost of the benefit in kind is calculated at HMRC official interest rate (circa 3% to 5%) of the total value of the loan as an annual charge. This interest charge is added to your salary from your limited company which could result in income tax for you. National insurance at the rate of 13.8% will also be applied to your for your limited company.

This is 32.5% higher rate of tax charged is refundable once the loan is paid back however this is an additional corporation tax charge to your business in the meantime.

How can you avoid an overdrawn directors loan account?
In the above example, we saw that the directors were initially owed £25,000 by the company for the property deposit. However, the property was refinanced and the directors took £50,000 lump sum for personal reasons. This means that the directors owe the company the remaining £25,000.

This may be repaid in a number of ways:

• Taking a wage and salary at the year-end, which will be subject to the usual income tax and national insurance contributions for both the employee and employer.
• Taking dividends out of the company. Please remember that £2,000 dividends may be taken tax-free by each shareholder. Please also note that you can only take dividends out of a company provided that it made sufficient profits.
• Write off the loan. If you write off the loan at the year-end the written off value would be a benefit in kind. This would be subject to income tax for the director on their self-assessment. The company would also pay 13.8% on the loan value written off

And?