Companies often borrow from their directors, especially property companies as 100% loan to value loans may not be available from lenders.
If the company pays interest on the loan it will have to register with HMRC and prepare CT61 returns
The CT61 requires the company to deduct 20% tax on the interest.
The Director may be entitled to the interest tax free
Personal Savings Allowance
You may also get up to £1,000 of interest tax-free depending on which Income Tax band you’re in. This is your Personal Savings Allowance.
|Income Tax band
||Tax-free savings income
Savings covered by your allowance
Your allowance applies to interest from:
- bank and building society accounts
- savings and credit union accounts
- unit trusts, investment trusts and open-ended investment companies
- peer-to-peer lending
So the Personal Savings Allowance should cover Directors Loans as explained in accountingweb
If you are lending to your company you should make sure that its at a market rate and you may want to consider your security for the loan.
You could opt for a charge at Companies House but at the very least you should have a loan agreement.
Many directors lend money to their businesses, especially during the start up phase.
But did you know the company can pay you interest net of 20% – the tax deducted at source is reported and paid each quarter using form CT61
Form CT61 cannot be downloaded or ordered online. To order a form, you need to phone the HMRC Accounts Office Shipley on Tel 01274 539 665.
Here is a link to the HMRC notes on Form CT61 http://www.hmrc.gov.uk/ctsa/ct61-notes-2010.pdf
If the loan is from a family member and they are a non taxpayer they won’t be able to use form R85 but they will still be able to claim the tax back either by contacting HMRC 0845 366 7850 or by filing a self assessment return
Interest payments are not subject to National Insurance and can be a tax efficient of recieving part of your income from your business.
The income will need to be reported on your self assessment return.
The interest charges will be tax deductable by the Company.
You may also consider registering your loan with Companies House as a Debenture, here is a link to help you register your charge http://www.companieshouse.gov.uk/infoAndGuide/faq/companyCM.shtml
This will make the you ‘the lender’ a secured creditor but you may have to take a secondary position behind your bank or other lenders or if other lenders are already lending you may need their permission to register a charge.