The rate of tax on Directors’ Loans increased at the start of the financial year, on 6 April 2016, from 25 per cent to 32.5 per cent of any amount loaned to a shareholder during the previous accounting year, which had not been repaid within nine months of the end of that year. This brought tax on Directors’ Loans in line with Dividend Tax.
Where a shareholder is also a director and interest is charged below three per cent, income tax becomes due on the difference between the rate charged and the three per cent.
Many shareholders had planned to extract funds from their companies through Directors’ Loans at a lower rate of tax than the new Dividend Tax rates.
Prior to a change of rules introduced for the 2012/13 tax year, directors and companies had been able to avoid this tax by “bed and breakfasting.” This entailed receiving a Directors’ Loan and repaying it before the end of the nine months using a new loan from the company.
While “bed and breakfasting” is no longer an option, there are alternative strategies available to mitigate tax on Directors’ Loans. So if you would like to know more, please contact us.
Link: Gov.uk Directors’ Loans