Once a Limited Company has been incorporated and the directors have been appointed, a Director’s Loan Account (DLA) is where you can keep track of all money you either borrow from the company or lend to it. In the company accounts the DLA is a balance sheet entry, and therefore does not affect the company’s profit and loss. In a nutshell, that’s it.
Things that increase a Directors Loan Account
Lending the company money or transferring property
If a director lends the company money, it is considered a liability in the company accounts in the same way as a loan from a mortgage company is treated. Providing there are enough funds in the company bank account, (leaving sufficient funds for any Direct Debits or other outgoings) then the director can withdraw this amount tax-free at any point in the future.
This can be a monthly amount or can be a lump sum payment.
Example of funds introduced:
- If you are transferring a property from your personal name into a BTL Limited Company, the cost of the property included in the company accounts will be the market value on the date of transfer. Providing there is no mortgage on the property, the amount introduced into the DLA would then be the same market value.
- If you are purchasing a property in the Limited Company’s name, you may be introducing the deposit or cash for the purchase personally. These funds will also be introduced into the DLA in the same way as option ‘a’.
What else can increase the credit balance?
- Dependent on company reserves, should the directors wish to declare a dividend but not physically withdraw the cash, this will increase the credit balance available to be withdrawn at a later date.
This is often taken up if the company bank account balance is low, but a director wants to utilise their £2,000 tax-free dividend allowance per annum.
- The director could pay for business expenses personally – Any expenses that are wholly and exclusively for business purchases that the director has incurred from their personal bank account will increase the DLA balance available if the expenses have not been reimbursed.
- Other expenses such as trivial benefits, mileage, and other tax allowances.
(i) Trivial benefits – if the benefit meets the below criteria, a director can claim £50 per month up to a maximum of £300 per annum, per director:
– it cost you £50 or less to provide
– it isn’t cash or a cash voucher
– it isn’t a reward for work or performance
(ii) Mileage – Allowable business mileage claimed throughout the year and added to the DLA at £0.45 per mileage to 10,000 miles, and £0.25 for miles thereafter. Please note, these limits apply for the tax-year and not the company year-end.
Please note, fuel costs alone are not an allowable expense and will reduce a credit DLA balance.
(iii) Other allowances – If you are required to wear a uniform as part of your work, there are additional benefits such as clothing, cleaning, and footwear allowances.
DLA in debit balances – monies withdrawn
A director’s loan is when you (or other close family members) get money from your company that is not:
- A salary, dividends, or expense repayment
- Money you have previously paid into or loaned the company
If your DLA has a debit balance at the company year-end, you may be subject to additional tax.
As an overdrawn DLA is seen as an interest-free loan account, there may be additional corporation tax due under Section 455 at 38.75% (2022/23 rate) on the outstanding balance.
How can I avoid Section 455 tax?
Proving your overdrawn DLA is repaid by declaring dividends (dependent on available reserves) or the funds are paid back to the company within 9 months after the year-end date, you will not have to pay Section 455 tax.
If your DLA was overdrawn by less than £5,000, you cannot withdraw further amounts within 30 days of the repayment made to company account to avoid S455 tax.
Withdrawals include transfers, cash withdrawals or using the business account for personal expenses that are not wholly and exclusively for the purpose of trade.
If your DLA was overdrawn by more than £5,000, you will not be able to withdraw any funds that might bring your account into an overdrawn state again.
If you do not meet the above conditions, we will be required to amend the company accounts and resubmit your CT600 to include the S455 tax.
If your overdrawn DLA exceeds £10,000 at any point in the tax-year
In this instance the loan is treated as a ‘benefit in kind’ (BIK). You will be required to file a P11d and will need to pay Class 1a National Insurance on this BIK.
If your DLA continues to exceed £10,000 overdrawn, you will be required to file a P11d for each tax-year that it exceeds this value.
The company will also have to pay National Insurance on this BIK, as well as the individual director.
Reclaiming Section 455 tax
Your company can reclaim the S455 Corporation Tax it pays on a director’s loan that has been repaid, written off or released. You cannot reclaim any interest on the Corporation Tax.
If the repayment has been made within two years of the year-end in which the loan was first introduced, we can submit this request by amending and resubmitting the CT600.
For anything after two years we will have to submit this request in writing via a CT600A form.
Speak to me or one of our team of specialist property accountants today to fix up a FREE, no-obligation consultation about all things property. Call us now on 01902 711370 or 0800 907 8633.