Loans to Shareholders Rules

It is not uncommon for business-owners to want to borrow money from their company from time to time, and it is important to know how these types of loans work in practice.

The following guide to the rules on businesses loaning to shareholders, or director-shareholders, looks at what is allowed, what interest should be charged, the tax implications, as well as the reporting and record-keeping obligations for shareholder loans.

 

Rules on loans to shareholders

A director-shareholders loan is money that you draw from your company’s accounts that cannot be classed as either a salary, dividend or legitimate expenses repayment, nor as a loan repayment to yourself for money that you have previously paid into the company. As such, this is money that you borrow from your company and will eventually have to repay.

Taking out a director-shareholders loan can give you greater access to company money than you are currently getting by way of salary or dividends, and can be used to cover short-term or one-off expenses. However, there are risks and responsibilities involved when borrowing money in this way, not least the fact that these types of loans are admin-heavy and come with the potential for hefty tax penalties. This means that director-shareholders loans should not be used routinely, but kept in reserve as an emergency source of personal funds.

There is no legal limit as to the amount of money you can borrow from your company, although you should carefully consider how much the business can afford to lend you and how long it can manage without this money, before causing potential cash flow problems. For a loan of £10,000 or more you should also seek the approval of all shareholders.

 

Interest calculations on loans to shareholders

In the same way that there is no legal limit as to how much you can borrow from your company, there are no strict rules on how much interest should be charged, if any. The issue of interest is entirely a matter for the company although, where interest does fall due, you will need to pay the correct amount based on your outstanding director-shareholders loan.

Importantly, however, if you pay interest on a director-shareholders loan below the official rate set by HMRC for beneficial loan arrangements, the amount of the discount may be treated as a ‘benefit in kind’ by HMRC. This essentially means that you, as the director-shareholder, will be taxed on the difference as between the official rate and the loan rate that you are actually paying. The official rate of interest typically changes over time, in response to base-rate changes; for the year 6 April 2022 to 5 April 2023, it is 2%.

 

Tax implications of loans to shareholders

If you are a shareholder, sometimes called a ‘participator’, as well as a director, both you and your company may have to pay tax on a director-shareholders loan. However, your personal and company tax responsibilities will depend on how quickly the loan is settled.

Below we set out different scenarios with the personal and company tax responsibilities that can potentially arise out of a director-shareholders loan:

If you repay the loan in full within 9 months from the end of your Corporation Tax (CT) accounting period you will have no personal tax responsibilities. There will also be no company tax responsibilities, unless the loan was more than £5,000 and you took another loan of £5,000+ up to 30 days either before or after you repaid it, where CT will then become payable at 32.5% of the original loan. You should use Form CT600A when preparing your Company Tax Return to show the amount that you owe. After you fully repay the original loan, you can then reclaim the tax paid, but not the interest.

If you do not repay the loan within 9 months from the end of your CT accounting period, you will again have no personal tax responsibilities, but Corporation Tax will be payable at 32.5% of the outstanding amount. You should use Form CT600A when preparing your Company Tax Return to show the amount that you still owe at the end of the accounting period. Interest on this tax will be added until the CT is paid or the loan is repaid, where you can again reclaim the tax but not the interest.

If the loan is either ‘written off’ or ‘released’, ie; not repaid, including if the company goes into liquidation, your personal responsibilities will be to pay Income Tax on the loan via a self-assessment tax return, whilst your company’s responsibilities will be to deduct Class 1 National Insurance Contributions (NICs) through the company’s payroll.

If you paid interest to your company on the loan below the official rate (as set out above), you will also need to check if you have extra tax responsibilities, where the amount of any discount may be treated as a benefit in kind and on which you will be taxed.

Additionally, you should bear in mind that any loan of £10,000+ will automatically be classed by HMRC as a benefit in kind. This means that if you owe your company more than £10,000 at any time during the year, the loan must be treated as a benefit in kind and Class 1 NICs deducted. You must also report the loan via a personal self-assessment tax return.

 

Reclaiming Corporation Tax on loans to shareholders

Your company can reclaim any Corporation Tax that it pays on a director-shareholders loan that has been repaid, written off or released, although you cannot reclaim any interest paid on that tax. A claim can be made after the relief is due, which is 9 months and 1 day after the end of the CT accounting period when the loan was either repaid, written off or released. Your company will not be repaid before this, and you must claim within 4 years.

 

Reclaiming within a period of 2 years

If you are reclaiming Corporation Tax within 2 years from the end of the accounting period when the director-shareholders loan was taken out, you should use Form CT600A to claim when preparing a Company Tax Return for that particular accounting period or, instead, amend this online.

However, if your tax return is for a different accounting period than the one during which the loan was taken out, or you are amending your tax return in writing, you should instead use Form L2P with your Company Tax Return. You should tell HMRC how you want the repayment within your Company Tax Return.

 

Reclaiming after a period of 2 years

If you are reclaiming Corporation Tax 2 years or longer after the end of the accounting period when the director-shareholders loan was taken out, you should fill in Form L2P and include it with your latest Company Tax Return or post this separately. HMRC will repay your company either by using the details you provided in your latest Company Tax Return or by sending a cheque to your company’s registered office address.

Clearly, however, the ideal way to avoid payment of CT in the first instance is to ensure that any director-shareholders loan is repaid within 9 months, where any unpaid balance will be subject to 32.5% Corporation Tax. Even though you can claim this tax back once the loan is repaid, this can be a lengthy and cumbersome process. This means that if you have taken longer than 9 months to fully repay your loan, and your company has been charged Corporation Tax on the unpaid amount, you cannot claim this tax back until 9 months after the end of the accounting period in which you completely cleared the debt.

Another way of potentially avoiding the imposition of Corporation Tax is to wait a minimum period of 30 days between repaying the first loan and taking out another, where many director-shareholders will pay off one loan prior to the 9-month deadline, only to take out a new one. HMRC refers to this practice as ‘bed and breakfasting’ and typically considers this to be tax avoidance, although sticking to the 30-day rule is not necessarily guaranteed to satisfy HMRC that you are not trying to avoid tax. This is why you should not make a habit of relying on director-shareholders loans for additional cash.

 

Reporting and record-keeping obligations for shareholder loans

When it to comes to director-shareholders loans, the law states that you must keep a record of any money you borrow from your company. This record is known as a director’s loan account and, in addition to any cash withdrawals, it must also include any money you pay into the company. This account is essentially where you keep track of all the money you both borrow from your company or that you lend to it. As there can be tax implications depending on how much is borrowed by way of a director-shareholders loan, and over what period of time, good record-keeping is essential to ensure that the correct taxes are paid.

If your company is borrowing more money from you than it is lending to you, as a director, then the account will be in credit, where the company owes you money. You will then be technically classed as a company creditor. In contrast, if you have borrowed more, then the director’s loan account will be said to be overdrawn, where you owe the company money. Be aware that other shareholders, and perhaps other creditors, may become concerned if your director’s loan account is overdrawn for any length of time, where you should aim to ensure that it is either in credit or at zero most of the time.

In addition to any director’s loan account, the company’s own accounts should also show all money withdrawn from the company and paid back. This means that, at the end of your company’s financial year, you must include any money that you still owe the company on the ‘balance sheet’ in your annual accounts. Your company’s annual accounts, also known as ‘statutory accounts’, are prepared from the company’s financial records at the end of your financial year. At the end of your company’s financial year, you will either owe money to the company, which will be shown as an asset on the balance sheet or, if the company owes you money, this will be shown as a liability. If you paid interest below the HMRC official rate, your company must also record any discount in interest below the official rate as company income, and treating the discounted interest as a benefit in kind.

It may be possible for a director-shareholders loan to be offset, by declaring a dividend at the company’s year-end, provided sufficient funds are available at that time, but otherwise the loan will remain repayable. Importantly, the money that you borrow will still belong to the company and has to be paid back, where this is the case even following insolvency. If your company is subject to liquidation proceedings, legal action can be taken against you to collect any money you owe to the company, in order to repay the company’s creditors. If you cannot afford to repay this money you may be at risk of bankruptcy.

 

Best practice advice

The following director-shareholders loan checklist provides some best practice tips and key things to remember if you are considering borrowing money from your company:

• take out director-shareholders loans only when absolutely necessary
• repay your director-shareholders loan within 9 months and 1 day of the company year end, where at all possible
• aim to borrow no more than £10,000
• if you borrow £10,000+, you must report it via your self-assessment tax return and your company must treat this as a benefit in kind
• wait a minimum of 30 days between taking out a different director-shareholders loan
  do not allow your director’s loan account to be overdrawn for extended periods.

 
Overall, director-shareholders loans are a tricky area, so should not be used either lightly or routinely. Strict book-keeping and accounting practices are also important when dealing with these loans, so you must ensure that you are using an experienced accountant.

 

Loans to shareholders FAQs

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert professional advice should be sought.