ONE of the many unwelcome aspects of the recent budget for owner managed companies was the change in the tax treatment of loans certain shareholders could draw from their companies. This is the latest attempt by HMRC to change shareholder remuneration practice by making the loans more expensive, in tax terms.

Until 5 April 2016 shareholders who had an overdrawn loan account or borrowed funds from their companies and who did not repay the borrowing within nine months of the company’s year-end were required to pay a deposit to HMRC based on 25% of the outstanding loan. The tax deposit was refundable if the loan was repaid or written off by the company. The 25% was intended to represent the effective amount of income tax the borrower would have had to pay if they had received a dividend instead of a loan.

With effect from 6 April the amount of tax to be deposited has increased to 32.5%, in line with the increase in the dividend tax charge.

The increased rate only applies for new loans taken out after 6 April or overdrawn loan accounts, and should not therefore impact on any old loans where the 25% tax rate has already been paid over.

Many shareholders have in the past used the “overdrawn loan account“ route as a method of avoiding income tax on the amount of the loan, drawing out funds in advance and then clearing the outstanding loan by the payment of a dividend a couple of months later potentially in a later tax year to defer the tax.

This is still possible but the tax cost of not repaying the borrowing within the nine month period has as a result of the change been increased.

Avoiding the new charge on new loans or overdrawn loan accounts will therefore be brought more into focus with shareholders and companies considering the alternative ways in which old loans and any new loans are held, as well as considering the alternative methods of either repaying the borrowing or writing off the loan altogether.

We would recommend that shareholders review any loans or directors loan accounts they have drawn from their companies to ensure that enough tax has been paid or review the potential for repaying the loan tax efficiently.

For more guidance, contact Alastair Byrne on 01904 717260 or email him at ajb@jwpcreers.co.uk