Directors Loan To Company
The term 'Director Loan' can refer to a loan from a director to a company, or from a company to a director. This article will focus on everything you need to know when a Director lends money to the company. If you require a Director to guarantee a third party loan on behalf of the company, go to our page on Director's Guarantees.
Key Takeaways
- It is very common for Directors to loan money to their company for start up costs or cash flow continuity.
- The terms of the loan should be set out in a professionally drafted loan agreement .
- For any significant sum of money, we strongly recommend that you consider securing the loan against a company asset.
- The loan and each repayment should be properly recorded in the company's financial reports.
How do you record a director loan to a company?
A director loan to a company must be recorded in their Director's Loan Account (DLA). It is essential that any money loaned in either direction is recorded and accounted for, in order to comply with tax liabilities under the law. The terms of the loan should be recorded in a properly drafted loan agreement. This will record the amount of the loan, the repayment terms and trigger, whether and how the loan will be secured, as well as the agreed interest rate and late repayment charges.
Is directors loan a liability or equity?
A directors loan to a company is a liability in the company's balance sheet and liabilities are monies owed by the company at the time of reporting. This happens at least once at the end of each financial year, but is often reported quarterly, or monthly.
Interest
Most loan agreements include an interest charge. This is normal and should compensate the Director for their loss of income while the company has their money, versus if they were to invest the loan elsewhere or simply hold it in a savings account. The amount of interest you agree on will depend on the nature and duration of the loan.
As of April 2022, the HMRC official rate of interest is 2%. Speak to a financial advisor if you wish to set the interest rate higher or lower than 2%. You may be able to set the interest at up to around 8%, if you can justify the difference to HMRC, and/or the other directors.
How can I secure a Director's loan to company?
It is prudent to secure any loan over a property or other asset in order to protect the lender. The simplest way to do this is to have your solicitor register a second charge on a property held by the company, at the Land Registry. If there is a pre-existing mortgage or loan on the property, then this second charge will require the consent of the primary lender.
An unsecured or improperly secured loan agreement will place the lender at greater risk of being unable to recover the loan. In the event that the company fails to repay the loan, the lender will be forced to pursue the debt through the courts, ultimately filing for bankruptcy proceedings against the company.
What is the tax liability on a Director's loan to Company?*
Your company does not have to pay corporation tax on the money it borrows from a Director. If interest is charged on the loan, the director will pay income tax on the interest.
The company must pay the interest to the Director, less income tax (20%). This income tax must be paid and reported every quarter using a CT61 Form. The Director will need to report this income in a self-assessment.
The interest paid by the company is classed as a business expense.
Frequently Asked Questions
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