Andrew McQueen
As highlighted in the ‘HMRC Official Rate of Interest Remains At 2.25%’ article, the HMRC rate of interest on beneficial loans looks quite attractive compared to the Bank of England Base rate of 5.25%, and the much higher rates charged by banks for unsecured loans.
It is important to note that loans made to participators (broadly shareholders) of a close company may incur a special tax charge on the company if the loan remains outstanding 9 months after the end of the accounting period. This charge is currently 33.75%, matching the higher rate of tax on dividend income. This tax charge is only repaid to the company after the loan to the participator is repaid or written off.
For example, suppose Fred, the managing director and controlling shareholder of Bloggs Ltd, is loaned £100,000 interest-free on 6 April 2023 and makes no repayments during the year ended 31 March 2024. In that case, the company must show a taxable benefit in kind on Fred’s 2023/24 P11d of £2,250 (2.25%).
If Fred repays the loan in full before 31 December 2024, there would be no special charge on the company, although Fred would be assessed on the beneficial loan for the 9 months the loan existed in 2024/25. Note that there are anti- “bed and breakfast” rules to counteract the situation where the loan is readvanced by the company. The anti-avoidance would not apply where the loan is cleared by crediting a bonus or dividend to Fred’s loan account.
However, if Fred only repays £60,000 before 31 December 2024, leaving £40,000 outstanding, the company will incur a tax charge of £13,500 (assuming the 33.75% dividend rate continues), payable in addition to the company’s corporation tax liability for the year ended 31 March 2024. The company would show a taxable benefit in kind on Fred’s 2024/25 P11d based on the official rate of interest on beneficial loans for 2024/25.
If the company decides to write off or waive the outstanding loan in the year ending 31 March 2025, the £13,500 will be refunded. However, Fred would be assessed on the £40,000 as an income distribution (dividend) arising at the date of waiver in 2024/25.