Understanding the financial responsibilities and opportunities as a company director can sometimes feel overwhelming.

One of the key concepts that you may come across is a director’s loan. This guide will help you understand what a director’s loan is, how it works, and the various implications it can have on both your personal and company finances.

What is a Director’s Loan & How Do They Work?

A director’s loan is money that you, as a director, either borrow from or lend to your company. It’s important to note that this money is separate from your salary, dividends, or legitimate expenses.

Can I Borrow Money from My Limited Company? – Yes, you can. Although there are certain restrictions to be aware of.

For instance, if you find yourself in need of funds for a personal matter, you might decide to borrow money from your company. This borrowed money is considered a director’s loan and will need to be repaid eventually.

Conversely, you might decide to lend money to your company, perhaps to help with start-up costs or to navigate through cash flow difficulties. In this case, you become a creditor to your company.

The Director’s Loan Account (DLA)

The Director’s Loan Account, or DLA, is a record of all the money you either borrow from or lend to your company. It’s a bit like a running tab, keeping track of what you owe the company, or what the company owes you.

If you lend more money to the company than you borrow, your DLA is in credit. However, if you borrow more than you lend, your DLA is considered overdrawn. It’s important to keep an eye on the status of your DLA. Shareholders and other creditors might become concerned if your DLA is overdrawn for a prolonged period. As a best practice, aim to keep your DLA in credit or at least at zero most of the time.

Reasons for Taking a Director’s Loan

There are several reasons why you might decide to take a director’s loan. Perhaps you need to cover an unexpected personal expense, or maybe you want to access more money than you’re currently receiving via salary and dividends.

Director’s loans can be a useful tool for managing short-term or one-off expenses. However, they should not be used as a regular source of personal funds.

They come with administrative responsibilities and potential risks, such as tax penalties, so it’s wise to use them sparingly and only when absolutely necessary.

Interest on a Director’s Loan

When it comes to interest on a director’s loan, your company has the flexibility to set the rate. However, if the interest charged is below the official beneficial loan rate, set by HM Revenue and Customs (HMRC), the difference may be treated as a ‘benefit in kind’. This means that you, as the director, may be taxed on the difference between the official rate and the rate you’re actually paying.

For example, if the official rate of interest is 2.5% and your company charges you an interest rate of 1.5% on your director’s loan, you could be taxed on the 1% difference. It’s therefore important to consider the potential tax implications when setting the interest rate on a director’s loan.

Borrowing Limits and Repayment Terms

The amount you can borrow as a director’s loan is not strictly limited. However, if you owe your company more than £10,000 at any time, the loan is considered a ‘benefit in kind’. This means it must be reported to HMRC and may be subject to tax.

Repayment terms for a director’s loan are also flexible. However, if the loan is not repaid within nine months and one day of the company’s year-end, your company will have to pay a tax known as Section 455 tax. This is charged at 32.5% of the loan amount. If the loan is later repaid, the tax can be reclaimed, but not until nine months and one day after the end of the tax year in which the loan was repaid.

Tax Implications of Director’s Loans

Director’s loans can have several tax implications. If your DLA is overdrawn by more than £10,000 at any time, the loan is considered a ‘benefit in kind’ and must be reported on your personal Self Assessment tax return. You may have to pay tax on the loan.

If the loan is not repaid within nine months and one day of the company’s year-end, your company will have to pay Section 455 tax. This is charged at 32.5% of the loan amount. However, if the loan is later repaid, the tax can be reclaimed.

If your company charges you below the official rate of interest on the loan, the difference may also be treated as a ‘benefit in kind’ and could be subject to tax.

Lending Money to the Company

As a company director, you may also lend money to your company. This could be to help with start-up costs, to support the company during a period of financial difficulty, or for any other reason.

This is very common with property investments and SPV’s.

As an SPV Company Director you will inject capital so that the mortgage deposit and purchase fees can be paid by the business. The Company will take out an SPV mortgage for the balance needed. Your loan sits on the DLA and you can take repayments as and when there’s cash to spare.

When you lend money to your company, you become a creditor. If the company makes a profit, it can pay you interest on the loan. This interest is a deductible expense for the company, reducing its Corporation Tax bill. However, you must declare the income and pay tax on the interest you receive.

Buy to let purchase, via SPV with Directors Loan

Let’s explore an example of how a director might use a Special Purpose Vehicle (SPV) to invest in a buy-to-let property.

Purchase price £300,000
Deposit £75,000

Here’s how the process might work:

Setting up the SPV

The first step is to set up an SPV limited company. The director would typically be the sole shareholder and director of this company. The SPV should be set up with the specific purpose of buying and managing property, which should be reflected in its SIC code (Standard Industrial Classification) when registering the company.

Funding the SPV

Next, you’ll need to fund the SPV. You can do this by lending money to the company. This is where the concept of a director’s loan comes into play. You lend the deposit funds of £75,000 to the SPV, which will be used for the property purchase. This loan is recorded in the Director’s Loan Account. In this case, you’ll need to provide 25% of the property’s value, as the remaining 75% will be covered by the Limited Company BTL mortgage.

You will also need to loan money to cover the other normal costs of purchasing a property.

Securing the BTL Mortgage

The SPV then applies for a £225,000 BTL mortgage to cover the remaining 75% of the property’s value. The mortgage will be in the name of the SPV, not you personally. The rental income from the property will need to be sufficient to cover the mortgage repayments.

Purchasing the Property

With the funds from the director’s loan and the BTL mortgage, the SPV purchases the buy-to-let property. The property is owned by the SPV, not you personally. This means the rental income and any potential sale proceeds belong to the SPV.

Managing the Property

The SPV is responsible for managing the property, including finding tenants, collecting rent, and maintaining the property. The rental income is received by the SPV and can be used to repay the director’s loan and the BTL mortgage.

Repaying the Director’s Loan

You can decide to repay the loan from the rental income received by the SPV, although how and when this happens is up to you. Once the loan is repaid, any further income can be taken as dividends, subject to the payment of Corporation Tax.

Tax Implications

The SPV will need to pay Corporation Tax on its profits, and you will need to pay Income Tax on any dividends you receive. However, the loan from you to the SPV is not typically subject to tax, as long as it is repaid within the stipulated time frame.

This is a simplified example for illustration purposes only.

The Risks of Director’s Loans

While director’s loans can be a useful tool, they also come with risks. One risk is the potential for ‘accidental’ director’s loans. This can happen if you take more money out of the company than you’re entitled to in salary and dividends. If this happens, the excess is treated as a director’s loan and must be repaid.

Another risk is the practice of ‘bed and breakfasting’. This is where a director repays a loan just before the company’s year-end to avoid Section 455 tax, then immediately takes out a new loan. HMRC views this as tax avoidance and can apply the tax retrospectively.

Finally, director’s loans require careful record-keeping. You must keep track of all money borrowed from or lent to the company, and report this to HMRC. Failure to do so can result in penalties.

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