Find out about the implications of lending your company money
Can I lend my business money?
Most small companies start trading with money borrowed from the directors, which can later be paid back.
These loans are typically done through informal “director’s loans“.
This loan doesn’t have to be in the form of money, is could be dividends declared and not paid, salary payments not taken yet, mileage claims not withdrawn, and paying for goods for the company.
When this loan is repaid, there is no impact on the tax liability of the company or the director, but do I have to charge interest on a loan to my company?
Do I have to charge interest on a loan to my company?
You don’t have to, and you will not pay corporation tax on any funds that were advanced since they are not a profit.
The director can, however, agree to make the loan without charging interest, or can agree an interest rate with the company.
The interest can be charged at any rate, but if it exceeds the rate which would be charged on a commercial loan, then this may be taxed as earnings for the director, not interest.
The director and the company should draw up a written agreement which includes interest rate and repayment date.
Interest paid by the company will count as taxable income for the person lending it.
The company will need to submit CT61 returns, which will tax the interest at 20%.
The interest counts towards your personal savings allowance, so the first £1,000 is tax free. As the interest is paid after tax, you could be due a refund of up to £200 from HMRC.
How does the company pay interest?
Interest charged to the company on a loan is an allowable business expense, providing that the funds provided are for the business to trade and not just for the director to use the company like a bank account.
Using the company to hold private money can also affect whether entrepreneurs relief is available if the director disposes of the shares at a later date.
If the loan lasts longer than a year, the company must deduct basic rate tax from payments of yearly interest made to an individual.
If the loan is for less than 12 months then this does not apply.
What if I borrowed the money to make the loan?
If you have borrowed money in order to lend it to the company, you are entitled to relief for the interest paid on the loan if:
- You work for the company and own some ordinary shares, or
- You hold at least 5% of the share capital, and the loan is a “qualifying loan”
In order for the loan to be qualifying it must be one of the following:
- used to acquire shares in a close company that is not a close investment-holding company
- used by the company wholly and exclusively for the purposes of the business
- used to repay another qualifying loan