Background
Where a loan is provided to a director by their company, interest free or below the official rate of interest, then a Benefit In Kind (BIK) can arise on loans above £10,000. The BIK is calculated on the loan at the ‘beneficial rate’, less any actual interest paid by the individual.
H M Revenue & Customs (HMRC) has recently confirmed that the official rate of interest will not increase for director’s loans which are outstanding throughout the 2024/25 tax year. For the second year running when using the normal average method of calculation, HMRC’s official rate of interest will remain at 2.25%, despite the current base rate being 5.25%. This relatively cheap interest rate offers an opportunity for a low cost of borrowing for a director from their company and/or a relatively low BIK tax charge.
Detail
A company may wish to make funds available for the use of a director or shareholder by means of a loan. This will have tax implications for the company and for the individual.
A director’s loan arises when a company director (or other close family members) is lent money by their company that is not a salary, dividend or expense repayment, or money previously paid into or lent to the company. In general where interest is charged on that loan by the company at the official rate of interest or higher then no additional tax liability arises on the director.
In most circumstances, there will be no tax consequences when the loan is made. However, care should be taken where the loan is made in anticipation of the payment of salary or a bonus. In this case, the amount advanced may be treated as earnings with the result that PAYE must be applied at the time the funds are made available to the director.
There are benefit-in-kind (BIK) implications where the loan is provided interest-free or if the interest charged is less than that which would be payable at the official rate, which HMRC have now been confirmed will remain at 2.25% for the 2024/25 tax year. However, there is an exemption for small loans. This means that, provided the total loan balance is less than £10,000, no benefit-in-kind tax charge arises even if the loan is interest free or at a rate below
For director’s loans over £10,000 a BIK will arise if interest is not paid on the loan at least equal to the official rate of interest. The BIK will be equal to the notional interest on the loan calculated at the ‘beneficial rate’, less any actual interest paid by the employee. The director will then have to report the BIK on their self-assessment tax return and tax may be payable on the benefit.
If a ‘close’ company (broadly a company which is controlled by 5 or fewer shareholders) makes a loan to a ‘participator’ (broadly a shareholder) a tax charge also arises for the company if the loan is not repaid with 9 months of the end of the company’s accounting period. The aim of the rules is to prevent the individual having the benefit of the funds without tax being paid.
The tax charge on the company, often referred to as s.455 tax, is currently 33.75% of the amount of the loan outstanding at the end of the company’s accounting period (32.5% for loans made before 6 April 2023). The deadline for paying s.455 tax to HMRC is 9 months and 1 day after the end of the period.
Various anti-avoidance provisions apply to prevent the ‘bed and breakfasting’ of a loan, i.e. where a loan is repaid in order to avoid a s.455 charge, only for another loan to be made shortly afterwards.
The rules surrounding shareholder loans can be complex so if you require more information on any aspect of these or any of the points raised above please contact our Tax Director, Jenny Marks.
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