rDirectors Loan Accounts For Property Investment Companies

What is a Directors Loan?

A directors loan is very simply a loan from the director of a company to the the company which can be used by the property investment company (or trading business) for business purposes. 

In the case of a property investment company, the business of the company is to purchase property which is a highly capital intensive business, meaning that over time the directors loan, referred to a a Directors Loan Account (DLA) could increase to a significant value. 

The Loan from directors into the company is then owed back to the director, meaning that the director can withdraw the loan back from the company, subject to there being sufficient cash in the company, and repayment of the loan is not taxed as would be the case if the director was paid by a salary or dividends. Noting the scale of a likely directors loan after the director has paid into the company multiple property deposits, we could easily be talking about hundreds of thousands of pounds - Therefore repayment of a directors loan account could easily form an important part of a directors retirement plan, enabling them to draw down on the directors loan account before then moving onto  dividends and salary.

Tracking the Directors Loan Balance & Becoming Overdrawn

So long as the Directors Loan Account remains in credit, meaning there is a positive balance, or the company owes the director rather than the other way around, then there is no issue. The director simply needs to track the size of the loan which can be measured by the amount of money the director pays into the company plus any personally paid expenses which were ‘wholly and exclusively’ business expenses less any money that is withdrawn. The director can make things easy by tagging payments in and out of the company bank account which are considered directors loan transactions as DLA.

Things become a bit more complicated if the direct withdraws more money on the loan than they have paid in, meaning the directors loan is in debit or overdrawn. There may be reasons why a director needs to come overdrawn such as to pay for an unexpected personal expense. If the directors loan account becomes overdrawn then the director will have 9 months and 1 day from the end of the companies reporting period to repay overdrawn directors loan account. If the overdrawn amount is not repaid by this time the the company will be required to pay a 33.75% tax on anything not repaid at this point.

Additionally the company will have to pay employers national insurance on any benefit in kind to the director and the director will be required to declare a benefit in kind using a P11D Forman pay benefit in kind tax.

Therefore do not become overdrawn on directors loan account or it could prove expensive!

Another thing to avoid is repaying the loan only to then immediately withdraw it again, this is termed as ‘bed and breakfasting’ by HMRC who impose a strict 30 day rule to prevent this - meaning you cannot take the loan out again until 30 days have passed or you will be hit by a ta bill.

Interest on directors loan accounts 

It is possible to charge your company interest on the balance on the directors loan and this can be at a commercial rate. Noting the fact the loan is unsecured it would be possible to charge a similar amount to what a commercial lender would lend to you based on these terms. The interest will be tax deductible for Corporation Tax purposes. Depending on the individual circumstances of the director you will likely have to pay personal tax on the interest if it is greater than the tax free interest thresholds, currently £1000 for basic rate taxpayers and £500 for higher rate taxpayers.

The company will be required to complete a CT61 form to send to HMRC and this needs to be requested rather than it being downloadable. Finally the company will be required to deduct 20% tax on the amount of interest that is paid.

Should you charge interest on a directors loan? It is really based on individual circumstances however there seems little point in paying much personal tax unless necessary, particularly if a higher rate tax payer. Charing interest on directors loan accounts is a valid strategy to consider by someone who is looking to live off their property income and doesn’t have a PAYE salary.

Conclusion 

Directors Loans are an important part of running property investment businesses and the nature of the business means that the balance could increase significantly over the years, and drawdown of the loan and charging of interest should form part fo the directors plan for renumeration over the life of the company. Ensure you do not become overdrawn on your directors loan or face a sting from the tax man.

Accufy Accounting can help ensure you manage your directors loan corectly,  If you would like to talk through this with someone then please get in touch.