• Director's loans - New rules 28 October 2013 | View comments

  • Rules for director's loans

    If a director borrows money from a close company (one that is controlled by 5 or fewer people), there is a 25% tax charge of the amount owed at the end of the financial year. But this is repayable if the loan is paid back within the following 9 months.

    Bed and Breakfasting

    This is where a director borrows money from a company, repays it to avoid the tax charge and then borrows money again within a short period!

    Anti-avoidance rules

    HMRC does not approve of bed and breakfasting and as such have set up 2 new rules:

    (1) 30-day rule

    (2) Intentions and arrangements rule.

    30-day rule

    If a director repays > £ 5,000 of the money he borrowed from the company, and within 30 days borrows more than £ 5,000, the reduction in the 25% tax charge will be restricted to the lower of the:

    - amount repaid and

    - amount reborrowed.

    Intentions and arrangements rule

    The above restriction on the 25% tax charge also applies where a director borrows £ 15,000 or more.

    Conclusion

    The values of the director's loans and the timing of the repayments are therefore crucial in reducing or eliminating the 25% tax charge.

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