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Legality of Director's Loan


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My limited property company is currently indebted to me.

 

My understanding is this is considered to be a director's loan but what legalises this? Someone suggested for the loan to be 'more legal' I should sign a Deed of Debenture with a floating charge.

 

I have several questions.

 

  • Is this necessary? - If not what can I do to formalise the agreement and outline the interest etc, will a statement do?
  • What interest can I charge on my loan?

 

I intend to take my 5K tax free dividends each year and then loan that money back to the company. Presumably the interest earned will be subject to income tax or is there an allowance for interest too?

 

Finally, if my company doesn't hold 5K, can I take it in principle as a director but in actual fact just add it to the debt that the company owes me?

 

I understand an accountant and lawyer will be useful (essential) so that advice isn't required (please) - I'd just appreciate anyone who's willing to summarise on this thread.

 

Thanks in advance,

Jordan

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  • 1 year later...

Hi Jordan,

I'm also looking at loaning money to my own company in the form of a debenture as I understand that it offers tax advantages (you can withdraw up to your loan amount tax free) and insolvency protection (you get second charge over the property - i.e. you get paid back after the mortgage company, but before other creditors). I wondered where you got to with this?

This is the info I'm working from: https://www.purnells.co.uk/limited-company/administrative-receivers/what-is-a-debenture  

Best,
Tass

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  • 2 weeks later...

A debenture would only be required where there was a desire to have security over the companies assets – otherwise it would not be necessary.

A simple loan agreement between you and the company should be sufficient. Also, if the company had granted you security, this could potentially Affect your ability to get finance from mortgage lenders as there would be the complication of having a ranking agreement to make their security rank ahead of yours.

 I dont think that you can take £5000 dividend tax-free if the company has no declared profit. If there was no declared profit and dividends were not available, you could still get repayment of loans tax-free under the simple loan agreement.

 Interest on loans would be taxable in your hands  when received, but the company may be able to get tax relief on the interest it pays. Some directors set up their companies so that they can get salary up to the income tax and NI thresholds (so the no tax and NI is paid) with dividends paid after that. 

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A similar question, but slightly different scenario. 

As the business isn't in profit yet, no dividends can be paid. 

Is it possible for :

1. Me to draw a directors salary (which is minimal at 5k) from the directors loan account ?

2. Me to loan back my drawn salary, thereby increasing the directors loan ? 

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 Hi, 

 I think that any salary paid would be an operating expense of the business, rather than coming back from the directors loan account. 

 As to the company paying you a salary and that money then being lent straight back to the company as additional loan, I guess on the face of it this could be done, but I’m not sure what HMRC would think of it. The company would get tax relief on the salary paid presumably, and if this is then simply being recirculated back to the company from you as a loan and then HMRC might “look through” the transaction as being connected and not accept it accordingly,  So one for discussion with the accountants.

 

If you are getting into the realms of paying salary, you probably want to be speaking to your accountant about operating a payroll any event.

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