Director’s Loan (s455) and Beneficial Interest: What You Need to Know

If you run a limited company and take money out that isn’t salary, dividends, or a legitimate business expense, it’s considered a director’s loan. While this can be a useful way to access funds, it comes with tax implications, particularly under Corporation Tax Section 455 (s455 CTA 2010). Additionally, the concept of beneficial interest plays a crucial role when considering who ultimately benefits from the loan.

What is a Director’s Loan?

A director’s loan is when a director borrows money from the company that isn’t a salary, dividend, or expense reimbursement. If the loan remains outstanding at the end of the company’s financial year, specific tax rules apply.

Understanding Section 455 Tax

Section 455 tax applies to director’s loans that remain unpaid nine months and one day after the company’s accounting period ends. The key points to note are:

• Tax Rate: The company must pay 33.75% of the outstanding loan amount as a temporary corporation tax charge.
• Repayment Relief: If the loan is repaid, the company can reclaim the s455 tax, but only after nine months and one day following the end of the accounting period in which repayment occurs.
• Avoiding Tax Charges: If the loan is repaid within the nine-month window, no s455 charge applies.

What is Beneficial Interest in a Director’s Loan?

Beneficial interest refers to the true financial ownership of the loan. While the director may be the named borrower, if another individual (such as a spouse or business partner) benefits from the funds, HMRC may investigate:

• Loans to Associates: If a loan is made to an associate (e.g., family members), it might still trigger an s455 charge.
• Personal vs. Business Use: If the loan is used for a business purpose that benefits the company, it may not attract s455 tax.
• Anti-Avoidance Measures: HMRC may scrutinise transactions designed to bypass s455 tax, such as repaying a loan just before the deadline and withdrawing the same amount shortly after.

Additional Tax Considerations

Benefit in Kind (BIK) or Interest Payment

If a director’s loan exceeds £10,000 at any point in the year and no interest (or low interest) is charged, it is considered a benefit in kind. The director:

• Must report the benefit on their Self Assessment tax return.
• May have to pay Income Tax on the deemed interest.
• The company must pay Class 1A National Insurance on the loan benefit.

However, instead of treating the loan as a benefit in kind, the director has the option to pay interest to the company at the HMRC official rate to avoid BIK taxation.

How to Manage Director’s Loans Efficiently

To avoid unnecessary tax charges:

✔ Keep accurate records – Maintain a director’s loan account (DLA) to track all withdrawals and repayments. ✔ Plan repayments wisely – Aim to repay loans within the nine-month deadline to avoid s455 tax. ✔ Charge commercial interest – Paying interest at the HMRC official rate can mitigate benefit-in-kind tax implications. ✔ Consider dividends – If profits allow, taking dividends instead of a loan may be more tax-efficient.

Conclusion

Director’s loans can provide short-term financial flexibility, but they come with significant tax implications under s455 CTA 2010. Understanding beneficial interest is essential to ensure compliance and avoid unexpected tax charges. Careful planning and professional advice can help you manage director’s loans effectively while minimising tax liabilities.