From time to time, you may need to withdraw money from your company’s account to pay for personal expenses. This is a type of loan from your company to you that’s known as a director’s loan account.
They can become overdrawn when your company is generating a large amount of revenue and profits. In order to access cash and reduce your tax obligations, you can withdraw cash as dividends from profit reserves.
If your company becomes insolvent, however, an overdrawn director’s account can become a personal liability. If your company is liquidated, the director’s loan account becomes a company asset that the liquidator will attempt to collect on.
Director’s loan accounts can often lead to tax complications, even in profitable and viable businesses. Any director’s loan accounts of £5,000 or more are considered to be employment-related loans and are subject to the official interest rate.
In order to avoid tax obligations related to the loan, the director will need to repay the loan at the official HMRC interest rate – if it values £5000 or more.
If your director’s loan is greater than £10,000, you could also face additional tax responsibilities. You can learn more about the tax responsibilities of a director’s loan account at the HMRC website.
Instead of repaying a director’s loan to your company at the relevant interest rate, it’s also possible to write off a loan made to a company director. Loans made to directors are treated as dividends and subject to appropriate taxes.
Writing off a director’s loan account of £5,000 or more means that it will be subject to the same income taxes as dividends. It will be treated as earnings for the National Insurance contribution and subject to class 1 NIC for employees and employers.
There are certain situations in which it’s possible to write off a director’s loan with no tax charges. A company director’s death, for example, means that the company can write off any director’s debts without being subject to tax charges.
If your company becomes insolvent and enters into administration or becomes liquidated, an overdrawn director’s loan account can be a serious issue for the company’s directors.
Director’s loans are viewed as company assets, and during the process of liquidating your company’s assets, the liquidator will be required to collect on the loan that you (or another company director) have borrowed from the company.
This introduces personal financial liability into a company liquidation.
In the event that your company becomes insolvent and you have an overdrawn loan account, you have a range of options:
If your company enters into compulsory or voluntary liquidation, the liquidator will be tasked with ensuring your loan is repaid. If your director’s loan account is highly overdrawn, this could lead to legal action being launched to recover the debt.
In some cases, this can result in seizure of your property, including your vehicle or – in cases involving very large debts – your home.
We’ve assisted hundreds of UK businesses, many of which had overdrawn director’s loan accounts when they became insolvent. Contact us now to learn which options are available to help you repay or offset your overdrawn director’s loan account.
Through the years our team of experts have helped hundreds of UK companies buckling under financial pressure find their way back to sustainable growth. Whether you need advice on dealing with creditors, repaying business debt, setting up a payment schedule with HMRC or any other pressing issue, we’re the company to call. We’ll guide you every step of the way through the process of restructuring, refocusing and recovering.
TruSolv has local offices around the country meaning we're accessible whenever you need us. Call us today and speak to one of our qualified and highly experienced team members. We’re local, independent and understand that each situation is unique. Call today and set yourself and your company back on the path to a more sustainable, profitable future.
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