Tax Factor
09 December 2009
Loans to Participators
Within the typical owner managed business there are times shareholders will find themselves needing to take a loan from their personal company.
This is not without consequences, and can give rise to a significant tax charge. However, in the current climate there are potential opportunities, particularly with the new 50% rate of income tax coming into effect from April 2010.
Where a close company makes a loan or advances money to a shareholder, and that amount has not been repaid by nine months after the end of the accounting period, HM Revenue & Customs (HMRC) will take a charge equal to 25% of the outstanding loan. This is not Corporation Tax, and cannot be reduced by losses.
A close company is one that is controlled by five or fewer shareholders, or any number of shareholders who are also directors. In practice, this applies to most owner managed businesses.
Once the loan has been repaid or has been discharged, the 25% charge becomes repayable to the company. The charge is therefore, effectively a statutory interest-free loan to the Treasury.
Are companies allowed to lend to shareholders?
Loans can be made to shareholders of private companies, if all shareholders agree to the loan.
Who does the charge affect?
In the legislation, the term used is participator rather than shareholder, which includes certain loan creditors and other persons entitled to receive income or assets.
There will also be a charge if the company makes a loan to an immediate family member of a participator even if they are not a participator themselves. Immediate family includes a spouse, parent, grandparent, child, grandchild, brother or sister.
HMRC do not accept that separate accounts with the same participator may be “netted off”, and it is also not possible to net off loans to or from different members of the family.
Opportunities for high earners
Currently, the effective rate of tax on a net dividend paid to a higher rate tax payer is 25%. From 6 April 2010, we will hit the new 50% income tax rate for those earning more than £150,000, with the top effective tax rate on net dividend income being 36.11%.
Company owners may therefore consider that it is more tax advantageous to take loans from their companies rather than dividends.
There has been little to indicate that there will be a change to the tax rate on loans to participators, so from 6 April 2010 this is a route that many will be considering.
Other points to watch
In addition to the 25% tax charge to the company, most interest-free or low-interest loans to a director or employee earning more than £8,500 will give rise to a taxable benefit, whether they are participators or not.
The benefit is currently charged at 4.75% per annum on the outstanding debt. A review of loans should be undertaken in April each year, to ensure that the P11D entries are correct.
If the combined loans to an employee in a tax year are less than £5,000 then there is no benefit, as these are exempt. An example may be a loan to purchase a season ticket.
If the loan is to a family member who is not an employee, the benefit will normally be charged on a family member who is an employee or director.
If you are considering taking a loan from your company, we would recommend that you take early advice to mitigate the tax charge. To discuss this further, please contact your usual Wilkins Kennedy contact.
