Problems of a Director’s Loan Account

Problems of a Director’s Loan Account

From time to time, you may need to withdraw money from your company’s account to pay for personal expenses. This is a type of loan from your company to you that’s known as a director’s loan account.

Director’s loan accounts are relatively common, with many company directors using company funds as a source of credit from time to time. Many companies, at a certain point or another, will have an overdrawn director’s loan account. Most of the time, director’s loan accounts become overdrawn when your company is generating a large amount of revenue and profits. In order to access cash and reduce your tax obligations, you can withdraw cash as you need it and then repay the loan using dividends from profit reserves.

If your company becomes insolvent, however, an overdrawn director’s account can become a major personal liability. If your company is liquidated, the director’s loan account becomes a company asset that the liquidator will attempt to collect on.

In this guide, we’ll look at what you should do if you have a director’s loan account that makes you personally liable to your company.

Director’s loan accounts for profitable, viable businesses

Director’s loan accounts can often lead to tax complications, even in profitable and viable businesses. Any director’s loan accounts of £10,000 or more are considered to be employment-related loans and are subject to the official interest rate.

In order to avoid tax obligations related to the loan, the director will need to repay the loan at the official HMRC interest rate. Note that this interest requirement only applied to director’s loan accounts of £10,000 or greater value. If your director’s loan is greater than £10,000, you could also face additional tax responsibilities. You an learn more about the tax responsibilities of a director’s loan account on the HMRC website.

Can you write off a director’s loan account?

Instead of repaying a director’s loan to your company at the relevant interest rate, it’s also possible to write off or “release” a loan made to a company director. Loans made to directors are treated as dividends and subject to appropriate taxes. Writing off a director’s loan account of £5,000 or more means that it will be subject to the same income taxes as dividends. It will be treated as earnings for the National Insurance contribution and subject to class 1 NIC for employees and employers.

There are certain situations in which it’s possible to write off a director’s loan with no tax charges. A company director’s death, for example, means that the company can write off any director’s debts without being subject to tax charges.

Director’s loan accounts and company insolvency

In the event that your company becomes insolvent and enters into administration or becomes liquidated, an overdrawn director’s loan account can be a serious issue for the company’s directors. Director’s loans are viewed as company assets, and during the process of liquidating your company’s assets, the liquidator will be required to collect on the loan that you (or another company director) have borrowed from the company.

This introduces personal financial liability into a company liquidation. It’s far from uncommon for a failing business to have an overdrawn director’s loan account – by some estimates, more than 75% of failing companies have overdrawn accounts.

In the event that your company becomes insolvent and you have an overdrawn loan account, you have a range of options. These include repaying the balance of the loan to the company, ending your risk of personal liability during company liquidation. It’s also possible to offset the loan by proving that you have injected a greater or equal amount of cash into the company as you have borrowed.

In the event that your company enters into a company voluntary arrangement (CVA) with the end goal of repaying its creditors and recovering, you may be able to offset an overdrawn director’s loan account using dividends from future profits.

If your company enters into compulsory or voluntary liquidation, the liquidator will be tasked with ensuring your loan is repaid. If your director’s loan account is highly overdrawn, this could lead to legal action being launched to recover the debt. In some cases, this can result in seizure of your property, including your vehicle or – in cases involving very large debts – your home. Because of this, it’s important that you have prepared a repayment or offset plan ahead of time for the director’s loan.

Whether your business is facing liquidation or you’re considering a CVA or pre-pack administration deal in order to restructure and continue trading, taking care of your director’s loan accounts is an important step in the business recovery process.

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