It is not unusual for a shareholder or director to take a company loan.
There are restrictions under company law on loans to directors or connected persons:
- A company can only make loans up to 10% of its net assets of the last financial statements laid before the members at the AGM
- If no financial statements have been prepared, the 10% limit applies to the called-up share capital
- If the company’s net assets fall the allowable lending amount falls and if the 10% limit is breached the excess must be repaid within 2 months.
Where a close company makes a loan to a participator or their associate:
- The company must pay income tax on the grossed-up amount of the loan at the standard rate (currently 20%)
- If the loan or part of it is repaid, the tax paid, or a proportionate part, can be refunded to the company without interest if a claim is made within 4 years of the year of assessment in which the repayment is made.
Exceptions to the above rules include when:
- The company’s business involves lending and the loan is made in the ordinary course of that business
- The loan is to a director or employee where:
- The total of all such loans to the borrower and spouse does not exceed an allowable amount
- The borrower works full-time for the company
- The borrower does not have a material interest in the company.
A loan is not treated as income for the individual unless it is forgiven by the company and if so:
- The company cannot recover the tax paid on the initial loan
- The amount forgiven is assessed as income in the year of forgiveness
- The assessment is based on the loan amount grossed-up at the standard rate for the year of forgiveness with credit taken for the tax withheld by the company.
- The write-off is not deductible against the company’s trading profits.