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What to do with overdrawn directors’ loan accounts

What to do with overdrawn directors’ loan accounts

We see many cases where directors draw monies from their companies with the intention of declaring a dividend at the end of the year, only to find that, due to the recession there are insufficient profits to declare a dividend and this leaves them with an overdrawn loan account.


In these circumstances it is possible to write off the loan account balance, treating it as either an overhead expense in the profit and loss account or showing it as an exceptional item, and avoid a corporation tax charge under S.455 CTA 2010.


The director has to show the loan written off on his tax return as if it were a dividend and he has to pay higher rates tax if appropriate. The director can choose to write off only so much of the loan to keep him in basic rate tax and thereby avoid any higher rates liability.


The company is unlikely to get a deduction for corporation tax purposes for the expense of the loan written off and it will have to pay Class 1 NIC on the amount written off.


This may be a potential solution to the problem of overdrawn loan accounts in some cases.

 

*Please note that this blog does not consider the issue of whether or not it is legal to declare dividends retrospectively in this way.


 

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The information provided in all of our blogs reflects only a narrative of some elements to consider on the topic. The blogs do not contain considered legal or accounting advice and should not be relied upon as advice. Please see our website's terms and conditions for full details of our disclaimer. If you are interested in obtaining advice, please contact us and one of our accountants will be happy and able to advise you on your own particular circumstances.

 

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