When a director of a company borrows money from the company, it is known as a director’s loan and there are tax implications associated with director’s loans.
In the UK, if a director’s loan is not repaid within nine months of the end of the accounting period in which the loan was made, the company will have to pay a tax charge known as the “section 455 charge.” The section 455 charge is currently set at 32.5% of the outstanding loan balance, and it is designed to discourage directors from using their companies as a source of interest-free or low-interest loans.
If the director repays the loan within nine months of the end of the accounting period, no section 455 charge will be due. However, if the loan is repaid and then taken out again within 30 days, the repayment will be disregarded for the purposes of calculating the nine-month repayment deadline.
It’s important to note that if the loan is written off or released by the company, this can also trigger a tax charge for the director under certain circumstances. This charge is known as the “benefit-in-kind” charge and it is calculated based on the amount of the loan that has been written off or released.
“Bed and Breakfasting”
To put it simply, ‘bed and breakfasting’ is a term used to describe a situation in which the director aims to avoid paying tax on their Director’s Loan.
The director repays their loan in full before their financial year-end to avoid paying any tax on it. But then they immediately take out another loan. This can continue with the intention of the loan never being repaid.
To prevent the system from being used in such a way, HMRC has implemented a measure that when the director repays a loan of over £10,000, they cannot take another loan of £10,000 within 30 days. If this happens, the entire loan will be taxed.
There are some circumstances where you can still be taxed even if the additional loan is taken outside of the 30 days window.
It’s important for directors and companies to keep accurate records of all director’s loans and repayments to ensure that they comply with the tax rules and avoid any unnecessary tax charges find Bristol Local account and Tax consultant near me Local Accountants Bristol Accountants Patchway Accountants Filton Accountants in Clifton BS8, Accountants in Bristol Accountants in Yate Accountants Local expert advisors Accountants in Bedminster BS3 , Accountants in Brislington BS4 , Accountants in Bristol South BS14, Accountants in Horfield BS7 Accountants Bradley Stoke Accountants close to me, the tax expert near me in my area, close to me