Business owners could seek to earn interest on directors’ loans with little-to-no tax implications, although only patient directors willing to meet the reporting requirements will benefit.
Even though the rate of interest charged by HMRC on late tax payments is currently 6.75%, the rate charged on a beneficial loan for 2023/24 is much lower at 2.25%. Therefore, taking a company loan could be an attractive option for directors.
There will be no taxable benefit for 2023/24 if a director’s beneficial loans do not exceed £10,000 at any point throughout the year.
The tax treatment of a director’s loan is complicated because there is also a company tax charge if the director is (very basically) also a shareholder and their company is a close company. For owner-managed companies, this will generally be the case.
- The tax charge is at the rate of 33.75% on the amount of loan should the loan still be outstanding nine months and a day after the end of the company’s accounting period in which the loan is made.
- However, this tax charge is refunded to the company if the loan is subsequently repaid by the director.
Given that high street banks are currently offering one-year fixed rate ISAs with an interest rate of around 4.2%, opportunistic directors could therefore:
- Take a £20,000 interest-free loan from their company;
- Invest this for one year, receiving tax-free interest of £840; and
- Repay the £20,000 company loan.
Depending on the timing and the company’s accounting period, there might not be a tax charge on the company. Even if the tax charge is payable, it will be repaid once the company loan is refunded. The director will have a taxable benefit of £20,000 at 2.25% = £450 (pro-rata according to the days outstanding during the tax year). Even for an additional rate taxpayer, the tax cost will just be a little over £200.
The downside will be the various reporting requirements for both director and company. Guidance is advisable.
HMRC guidance on director’s loans can be found here.