Background
Further to Muras Matters on 13 September, readers will be aware that from 6 April 2022 the rates of tax on dividends will increase by 1.25%. A knock on effect of this is that the rate of tax payable by a company on a loan made to a ‘participator’ will also increase from the same date.
Detail
When a company lends money to a ‘participator’, which is not repaid within 9 months of the company’s year-end, the company must pay tax on any amount still outstanding at that 9 month point. For this purpose a participator is generally an individual who holds more than 5% of the shares in a ‘close company’, which is broadly a company controlled by 5 or fewer individuals. For most small limited companies therefore a participator will simply be a shareholder.
The amount of tax due is tied in to the rate of tax payable by a higher rate taxpayer on a dividend. If dividend tax goes up then the tax due on a loan will also go up accordingly. Currently the rate of tax payable is 32.5% but from 6 April 2022 this will increase to 33.75%.
The tax is imposed on shareholder loans as an anti-avoidance measure to stop shareholders trying to avoid tax by not declaring a dividend and simply borrowing money from the company instead. As a result when a loan is repaid by the shareholder the tax is recoverable by the company. There is however a time delay in getting the tax back as it is not recoverable until 9 months after the end of the year in which the loan is repaid.
By way of example, if a participator borrows £20,000 from a company with a year end of 31 March 2020, and at 31 December 2020 £10,000 of that loan is still outstanding, then the company must pay tax of £3,250. If the loan is repaid to the company in, say, February 2021 then the tax is recoverable on 31 December 2021 (i.e. 9 months after 31 March 2021 being the year in which the loan is repaid). If the same charge were to arise after 6 April next year it would increase to £3,375.
In addition to the tax charge on the loan itself, if the loan is interest free (or low interest) then a benefit in kind will also arise on the difference between the interest which would be payable at the ‘official rate’, currently 2%, and the actual amount in interest charged. This charge is unaffected by the dividend tax changes and applies to loans in excess of £10,000.
If you would like more information on the tax implications of borrowing money from a company, please contact our Tax Director, Jenny Marks.
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