Directors Loan - flow of money
Discussion
Caught up with a mate last night who was talking about director's loans - how he's combining three companies into one and thus all his director's loans.
My understanding of a directors loan is that the company lends a director money or borrows money from a director.
None of his companies have made any meaningful amounts of money and what he's referring to is the money he has spent getting them set up - which I would term 'investment' - in that it was his personal money spent on start up.
He was adamant that these are 'directors loans' and that it's more tax advantageous to consider them as such.
This conflicts with my understanding so what's correct here?
My understanding of a directors loan is that the company lends a director money or borrows money from a director.
None of his companies have made any meaningful amounts of money and what he's referring to is the money he has spent getting them set up - which I would term 'investment' - in that it was his personal money spent on start up.
He was adamant that these are 'directors loans' and that it's more tax advantageous to consider them as such.
This conflicts with my understanding so what's correct here?
Ignoring the combining companies bit, the way I read that he is correct.
When you set up a company and you invest capital into it that company, the company then owes the director the money. e.g. £100k to buy the plant. The director loan account is then in credit £100k and £100k can be withdrawn without paying tax on it. Although I think that's from profits after corp tax.
The director's loan account can also be in debt, a director can borrow money from the company. But there are lots of implications with tax in this situation, I'm not knowledgeable on the exact details. Something like an overdrawn directors accounts at year-end is taxable or something to that effect.
Mortgage_tom said:
Ignoring the combining companies bit, the way I read that he is correct.
When you set up a company and you invest capital into it that company, the company then owes the director the money. e.g. £100k to buy the plant. The director loan account is then in credit £100k and £100k can be withdrawn without paying tax on it. Although I think that's from profits after corp tax.
The director's loan account can also be in debt, a director can borrow money from the company. But there are lots of implications with tax in this situation, I'm not knowledgeable on the exact details. Something like an overdrawn directors accounts at year-end is taxable or something to that effect.
I thought the direcot's loan could be deducted back before corp tax is paid, otherwise the investment would show as profit on which tax is paid. Surely you shouldn't be paying tax on money you've invested?When you set up a company and you invest capital into it that company, the company then owes the director the money. e.g. £100k to buy the plant. The director loan account is then in credit £100k and £100k can be withdrawn without paying tax on it. Although I think that's from profits after corp tax.
The director's loan account can also be in debt, a director can borrow money from the company. But there are lots of implications with tax in this situation, I'm not knowledgeable on the exact details. Something like an overdrawn directors accounts at year-end is taxable or something to that effect.
The simple answer is "it depends".
It's entirely possible to add liquidity to a company through a combination of the issue of shares (equity) and debt (one source of which could be loans from directors).
The tax efficiency comment relates to the fact that repayment of the directors loan will not be subject to tax on the individual (whereas salary or dividends most likely would be).
The balance of debt to equity funding isn't going to be standard across all companies. For example, a company needing £100k to start could issue 100k shares at £1 each (and no debt), or 1 share for £1 and raise £99,999 in debt. The route you'd choose would be impacted by factors such as long term plans for the business, need for (or desirability of) external investors or debt, and the personal tax situation of the founder/director(s).
It's entirely possible to add liquidity to a company through a combination of the issue of shares (equity) and debt (one source of which could be loans from directors).
The tax efficiency comment relates to the fact that repayment of the directors loan will not be subject to tax on the individual (whereas salary or dividends most likely would be).
The balance of debt to equity funding isn't going to be standard across all companies. For example, a company needing £100k to start could issue 100k shares at £1 each (and no debt), or 1 share for £1 and raise £99,999 in debt. The route you'd choose would be impacted by factors such as long term plans for the business, need for (or desirability of) external investors or debt, and the personal tax situation of the founder/director(s).
repayment of a loan is tax free for the individual (assuming there wasnt an interest rate applied to it) - if you put the cash in as equity then the its harder to get out you either have to pay a dividend (for which you will need distributable reserves ie need to have generated profit) or you need to do a capital reduction (which is a pain in the arse)
loans to a director trigger a s.455 charge which means the company has to give HMRC 32.5% of the loan amount which is then given back to the company when the loan is repaid. There is also a benefit in kind issue for the director if the loan is interest free etc.
loans to a director trigger a s.455 charge which means the company has to give HMRC 32.5% of the loan amount which is then given back to the company when the loan is repaid. There is also a benefit in kind issue for the director if the loan is interest free etc.
Directors loans were explained to me as; “just another bank account the company can use, where you’re the bank”.
So if you’re setting up a company and put £100k in to buy something then the company owes you that money and when they repay it it’s not income so you’re not taxed on it.
The logic being that you’d already paid tax on the money you loaned the company so it’s not income but repayment….. like if you lend me a tenner when I give it back to you you’re not taxed on it.
So if you’re setting up a company and put £100k in to buy something then the company owes you that money and when they repay it it’s not income so you’re not taxed on it.
The logic being that you’d already paid tax on the money you loaned the company so it’s not income but repayment….. like if you lend me a tenner when I give it back to you you’re not taxed on it.
StevieBee said:
Caught up with a mate last night who was talking about director's loans - how he's combining three companies into one and thus all his director's loans.
My understanding of a directors loan is that the company lends a director money or borrows money from a director.
None of his companies have made any meaningful amounts of money and what he's referring to is the money he has spent getting them set up - which I would term 'investment' - in that it was his personal money spent on start up.
He was adamant that these are 'directors loans' and that it's more tax advantageous to consider them as such.
This conflicts with my understanding so what's correct here?
You are sort of both right - he doesn't get much if any tax advantages from lending his personal money to his companies - but as Marcellus says, he doesn't get penalised either. He could charge an interest rate on the money to his companies, which might give him a small tax advantage due to the difference in tax between dividends and interest, but it isn't a huge amount.My understanding of a directors loan is that the company lends a director money or borrows money from a director.
None of his companies have made any meaningful amounts of money and what he's referring to is the money he has spent getting them set up - which I would term 'investment' - in that it was his personal money spent on start up.
He was adamant that these are 'directors loans' and that it's more tax advantageous to consider them as such.
This conflicts with my understanding so what's correct here?
Pistom said:
I thought the direcot's loan could be deducted back before corp tax is paid, otherwise the investment would show as profit on which tax is paid. Surely you shouldn't be paying tax on money you've invested?
Interest can be claimed against the P&L but the capital repayment is as if the company has earned it as profit so CT would be payablePistom said:
I thought the direcot's loan could be deducted back before corp tax is paid, otherwise the investment would show as profit on which tax is paid. Surely you shouldn't be paying tax on money you've invested?
It is a loan, repayment of such is made from cashflow. The only item to be offset against tax is the interest, if any. Any interest chargeable will be subject to personal income tax when paid to the director. The return of the capital amount has no bearing on tax to either party, provided it follows the rules.Gassing Station | Business | Top of Page | What's New | My Stuff