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TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15975
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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We have a client who is a director of two companies where

Customer Question

We have a client who is a director of two companies where he has a nil director's loan account with one company and his director's loan account is overdrawn by £105,000 in the other company.
If he leaves the companies as they are when he submits the accounts to HMRC, I think the overdrawn director's loan of £105,000 should be shown on his tax return and taxed as a distribution. He also has the option to give himself a dividend to cover the overdrawn director's loan account and it will be taxed accordingly on his tax return or he can liquidate the company and it will come under CGT.
I would like to know if there is any other way to minimise his overall tax liability.
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.

Take a look here, here and here for information on the tax implications of an overdrawn director's loan account.

If the director's account is still outstanding nine months and one day after the end of the company's accounting period, the company will have to pay a 25% tax charge on the outstanding balance. See section 2 here. This tax can be reclaimed if and when the loan is repaid partially or fully or released or written off at a specified time after the end of the accounting period or periods during which one of those events happens.

As far as the director is concerned, there will be a taxable benefit on the loan from the company. This should be reported in a P11D. See section 2 here.

There will be NIC implications for the director and the company of the loan is released or written off. See section 2 here. The sum written off will be treated as a dividend on which the director may have to pay a higher rate tax liability. This dividend will need to be disclosed in the director's tax return.

There are no CGT implications.

The only way to minimse the tax liability is to pay as much of the loan off as is possible as soon as possible or to declare a dividend if retained profits allow. Either will help to avoid or reduce the 25% tax charge on the company though there may be higher rate tax implications for the director.

I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.

Thanks very much for the answer but is it possible for the director to just allow the company to be struck off with the overdrawn director's loan as it currently stands?

Expert:  TonyTax replied 2 years ago.

Any overdrawn balance should still be disclosed as a dividend in the case of simply allowing a company to be dissolved by Companies House. Even if final accounts and corporation tax returns are not prepared and submitted, HMRC may still get involved.

If an individual does not account for a loan from their company, they could theoretically be charged with tax evasion or money laundering. On the other hand, HMRC do appear to let many dissolved companies fall by the wayside, probably due to a lack of resources.