Director's loan account

Mrs_pbradley936

Can someone clarify somethings for me because the only info I can find online is if you take money out via a Director's loan? I am the opposite -  I have given/loaned/lent my newly formed limited company a large sum to get it up and running.

Is it true that I can take money out as repayment of loans INSTEAD of a salary/wage and not have to pay income tax?

Also will the company not be "in profit" and therefore liable for corporation tax all the while the Director's loan is outstanding?

I was not thinking of charging  interest rate but should I? I am thinking that if I do the company will take longer to pay the loan back. So, if it is not in profit until the loan is paid back in full it will not pay corporation tax for a bit longer.

Jeremy535897

A director's loan from the company to you can be withdrawn by you without tax consequences to you. Tax problems only arise when you owe the company money.

The company's profit is independent of the director's loan. If it makes a profit for corporation tax purposes, it pays corporation tax. The director's loan is not a deduction, although, as you ask in your final point, if the company pays you interest, this should reduce its profit subject to corporation tax. You will be taxed on the income you receive from the company, but no national insurance would be payable. Note the complicating factor that the company has to deduct basic rate tax and pay it to HMRC:
https://www.gov.uk/directors-loans/you-lend-your-company-money

MobileSaver

Mrs_pbradley936 said:

Is it true that I can take money out as repayment of loans INSTEAD of a salary/wage and not have to pay income tax?

Yes, repaying the loan is nothing to do with your income and so there is no income tax payable. (UNLESS you decide to charge interest on the loan as that would then be income.)

Mrs_pbradley936 said:

Also will the company not be "in profit" and therefore liable for corporation tax all the while the Director's loan is outstanding?

No, the outstanding loan forms part of your Balance Sheet and so has nothing to do with your Profit and Loss Account.

Your profit is your income/turnover minus your business expenses and loans themselves are not business expenses. (HOWEVER if you were charging interest on the loan then the interest amount is a valid business expense and could be used to reduce your profit and thus your corporation tax.)

For example, the Director's Loan Account could owe you £1,000,000 but you could still make £100,000 profit in a year and would still have to pay corporation tax even though the company still owes you £1M.

Mrs_pbradley936 said:

I was not thinking of charging  interest rate but should I? I am thinking that if I do the company will take longer to pay the loan back. So, if it is not in profit until the loan is paid back in full it will not pay corporation tax for a bit longer.

You can do but as above there are pros and cons and it generates more paperwork and can generate more interest (no pun intended) from HMRC - you would be best to speak to your accountant regarding your specific circumstances. Particularly with interest rates being so low, it may be more trouble than it's worth depending on the size of the loan.

Mrs_pbradley936

Thank you both - excuse my ignorance but how do I get back the money I have loaned the company? Can I just have say £500 a month so long as the bank account is in the black? Can I have more?

Savvy_Sue

I am not an accountant, but I do feel you would benefit from speaking to one. Have you got one lined up for at least your first set of annual accounts? 

MobileSaver

Mrs_pbradley936 said:

Thank you both - excuse my ignorance but how do I get back the money I have loaned the company? Can I just have say £500 a month so long as the bank account is in the black? Can I have more?

Yes, you can bank transfer or write a cheque for as much or as little as you want, whenever you want, until the loan is repaid in full.

For example, if the amount you loaned is £10,000 you could transfer £10,000 today if the limited company bank account had sufficient funds or £1,000 a month for the next ten months. Similarly, you could instead transfer £500 this month, £1000 next month, nothing the following month if cashflow is tight then £750 the following month or whatever etc. It is entirely up to you how and when you pay yourself back (subject to being sufficiently in the black of course.)

Mrs_pbradley936

Savvy_Sue said:

I am not an accountant, but I do feel you would benefit from speaking to one. Have you got one lined up for at least your first set of annual accounts? 

Yes - I do have one but I did not use him to set up the company. I took Inheritance Tax planning advice and used them to do it. I have bought a book but am clueless about the differences between income/revenue/profit and all the rest of it. My husband and I have a Family Investment Company which is run along exactly the same lines as a limited company but the share structure is different and it has bespoke Articles of Association. 

My accountant sat in on all of the Zoom meetings before we took the plunge and I discovered the differences between an accountant and a tax planner. An accountant deals with things as they are now whereas a tax planner arranges things to your future advantage if they are able to. Basically we have taken a great deal of our assets out of what will become our "Estate" when we die.

Our solicitor introduced us to a tax planner and we paid a flat fee and gave them all of our information. They go away and come back a week later with plans and ideas to suit your age and circumstances. Details here: Family Investment Company - Saffery Champness

Grumpy_chap

Mrs_pbradley936 said:

My husband and I have a Family Investment Company 

FICs are a very specialised area and there are not a massive number of people with specific knowledge or experience.

In the main, an FIC is suited to those with very-substantial wealth (VHNWI - Very High Net Worth Individuals) and those people would normally have an army of professional advisors managing all the mundane factors such as how to administer Director's Loans and such like.

As well as an Accountant, which other professional advisors do you have access to?

How did you come to the position of creating a FIC?

Mrs_pbradley936

Grumpy_chap said:

Mrs_pbradley936 said:

My husband and I have a Family Investment Company 

FICs are a very specialised area and there are not a massive number of people with specific knowledge or experience.

In the main, an FIC is suited to those with very-substantial wealth (VHNWI - Very High Net Worth Individuals) and those people would normally have an army of professional advisors managing all the mundane factors such as how to administer Director's Loans and such like.

As well as an Accountant, which other professional advisors do you have access to?

How did you come to the position of creating a FIC?

My husband and I asked my solicitor about Inheritance Tax Planning and they sent us to people that took us down this route. I do have access to people but I had a couple of generic questions which have been answered. I have been a member here for several years and am rarely disappointed.

Prior to our dealings with tax planners we just assumed the "financial professionals" were all alike but it is surprisingly similar to medicine in that a GP can sort out most things and some people rarely go anywhere else for their health needs. I know that when I was young I only ever saw a GP for contraception. However, when you have something which they feel is beyond their scope they refer you on to someone else and that is precisely what happened here.

There was a unit set up by HMRC to look at them rather closely but that has since been disbanded HMRC’s FIC Unit disbanded (taxjournal.com)

They have become more popular since Gordon Brown tinkered with trusts Brown's night of the long knives | Money Marketing

When totting up our assets we were surprised to find ourselves labeled as "high net worth individuals". We have always been comfortable but it is property inflation that has made our worth go up. We have our own house of course but we have also inherited property and will likely inherit more - my mother is in her 90s and a home owner. We also have very good pensions and when my husband sold his engineering business in the 90s he was hired as a consultant as part of the package.

Inheritance will catch very many people that are unprepared for it solely due to property inflation. I doubt it was ever intended to catch out quite ordinary houses - we do not live in a mansion. We have a detached house in Hertfordshire and are in our 70s.  

gingerdad

We have a larger directors loan account in our business that we transferred in from our partnership - all done properly with HMRC - and we just draw it down as required. 

DullGreyGuy

Mrs_pbradley936 said:

Also will the company not be "in profit" and therefore liable for corporation tax all the while the Director's loan is outstanding?

I was not thinking of charging  interest rate but should I? I am thinking that if I do the company will take longer to pay the loan back. So, if it is not in profit until the loan is paid back in full it will not pay corporation tax for a bit longer.

Given the terms you are using it would suggest that you have set up (or about to) a LTD of which you will be a director but have had other posters here who talked about their company but then turned out they were sole traders. You are/have formed a LTD?

How would it be in profit? It will have £10,000 in its bank but will owe you £10,000 and so the asset and liability offset each other fully. 

You probably need to do some reading account company finance too because a LTD is not allowed to use cash accounting and so for example if your company was inactive for 364 days of the first year and on the last day it bought £50,000 of stock then its made no profit or loss as whilst your bank account is £50k lighter your balance sheet has an asset of the goods. This is different to a sole trader who can do cash accounting who can write off the purchase of stock immediately. 

You could charge the company interest and thus it avoids 19% corporation tax however you would then have to declare the interest on your self assessment and would potentially be taxed on it at your nominal rate.