Running a property rental business through a company is growing in popularity among landlords. This guide looks at property company director loans and how they work for landlords.
Last year, 41,700 buy to let companies were formed – an increase of 23% over the previous year.
Companies House statistics reveal landlords are running 228,743 buy to let companies – an all-time high.
But many landlords are unfamiliar with how to manage their property businesses as a company.
- 1 Director loan accounts or ‘the DLA’
- 2 Borrowing director loans
- 3 If your DLA is overdrawn
- 4 Taxing director loans of £10,000 or more
- 5 Claiming a tax refund on repaid director loans
- 6 Lending money to your company
- 7 More information
Director loan accounts or ‘the DLA’
A director loan – the DLA for short – is how landlords get money from a company that isn’t:
- Reimbursement of a business expense
- A refund of money you staked to the company, like a deposit to buy a property or a sum to cover cash-flow
Think of a director loan as money taken from the company for a non-business purpose that you are using as a personal overdraft.
Like any overdraft, the borrowing comes at a cost and must be repaid.
The DLA refers to accounting for the money paid in or withdrawn from the director loan account.
The figures make up part of the balance sheet in the company accounts each year.
Borrowing director loans
Taking a director loan from your property company is a management decision.
There’s no cap on how much you can take, but you must be careful to watch that your borrowings do not impact on the company’s cash-flow.
Should the DLA top £10,000, the debt becomes a benefit in kind for the director and must be reported on a self-assessment tax return.
DLA rules may mean paying interest on the loan and for amounts of more than £10,000, you should seek written approval from any shareholders.
Take too much and you could put the company at risk of paying an unexpected bill or settling a tax demand.
Taking the money
To take a director loan, simply transfer the money to your personal bank account or go to the bank and make a cash withdrawal.
Beware wrongful trading
If your company cannot repay its debts because of the director loan, then the business is trading insolvently. Should you be aware of the problem and carry on regardless, in some cases a director could face a charge of wrongful trading.
The penalties include disqualification as a director and possibly fines and even going to jail.
If your DLA is overdrawn
If you have an overdrawn director loan – which means you owe your company money – you may have to pay tax on the amount.
How much, if any tax, depends on one of three outcomes:
The loan is repaid before nine months after your accounting period ends
The accounting period ends on the final day of your company’s financial year.
For example, a director of a company with an accounting period ending on March 31 has until December 31 to repay the loan.
The company should file a Form CT600A with the corporation tax return (CT600) detailing the amount owed on March 31.
For loans over £5,000 – including if you took a further loan of £5,000 or more within 30 days of repaying the original loan – corporation tax is due on the original loan at a rate of 32.5%.
The tax rate is date sensitive. For a loan taken before April 6, 2016, the tax rate is 25%.
After repaying the original loan, the company can reclaim the tax but not any interest on the amount.
The loan is still owed nine months after the accounting period ends
Corporation tax is due at 32.5% on the outstanding amount – or 25% if the loan was taken before April 6, 2016.
Interest is added at the official rate until the DLA is repaid.
The official rate of interest sis published by HM Revenue & Customs and varies from year to year.
The loan is written off
If a director loan is written off o otherwise released, it means the debt is never repaid.
In this case, the director pays income tax on the amount through a self-assessment return and the company collects Class 1 national insurance contributions through the company payroll.
Taxing director loans of £10,000 or more
If you are a shareholder and a director, for example, you are the only person involved in the business as a single-member company, and the loan is for £10,000 or more at any time, the company must:
- Tax the loan as a benefit in kind
- Pay Class 1 national insurance on the full amount
As a director, you must declare the loan on your self-assessment return and pay interest at the official rate.
If you pay no interest or interest at a lower rate than the official rate, the company treats the interest paid as income and you treat the cash equivalent of the interest discount as a benefit in kind on your self-assessment return.
You may have to pay tax on the discounted interest.
Claiming a tax refund on repaid director loans
Your company can ask for a refund of any corporation tax paid on a director loan, but not for the interest.
The relief is available 9 months and a day after the end of the accounting period when the loan was repaid, written off or released.
The claim must go in within four years.
- If you reclaim the tax on the loan within two years, give HMRC the details on a Form CT600A or amend a CT600 return online.
Use a Form L2P if the CT600 you are filing does not refer to the period when the loan was taken
- Claims filed between two and four years should be by Form L2P
Lending money to your company
Any money you lend to your company is a standard practise and the company pays no tax on the loan.
If you charge interest, the company can treat the amount as a business expense, while you must declare the money as income on your self-assessment return.
However, the company must deduct 20% tax from the interest paid and file a Form CT61 reporting the transactions every quarter.