What is a directors' loan account used for?

The directors’ loan account is where you keep track of all the money a director lends to a company or from it.

A directors’ loan is common in companies, and there is usually no issue when the company owes a director money. However, a director taking a loan from the company can have legal and tax implications. Because a Limited Company is a separate legal entity, exercising caution and seeking professional advice before withdrawing from the company is essential.

This guide explains the implications of directors lending money to the company and the company lending money to the directors.

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Can a director loan money to the company?

A directors’ loan is a frequently used method for a company director to provide funds to their company at the start-up stage, during challenging times, or during expansion.

At the outset, a director may lend the company a sum of money, e.g., €10,000, to cover company formation Ireland costs and initial set-up fees and enable the company to start making sales.

Once the company establishes and earns money, it can repay the director the entire loan without tax implications.

When would a director loan money to the company?

01.

During negative cash flow

A director can infuse cash into the company to help it navigate these turbulent periods, and the company can repay the director when things recover.
02.

To fund company growth

The director can invest money in the company to finance its business expansion, and the company can repay them in the future.
03.

To settle debts

Directors can settle any company debts personally, and the company can reimburse them for these payments.

When is a directors' loan, not a loan?

If a director lends money to a company without written evidence, the payment will be considered a loan only if proven in court. The company will repay the directors’ loan only after settling the amounts owed to other parties, with the directors’ loan being the last in the repayment ranking.

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Do you pay tax on a directors' loan?

Neither party has tax implications in the case of a loan from the director to the company.

On the other hand, there are tax implications for both the director and the company when a director owes money to the company at year-end. These loans are generally not encouraged as they incur higher interest charges than if the director obtained a loan from a bank.

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Can a company loan money to a director?

Suppose the company makes any payments to a director that is not their salary, not part of their remuneration package or not considered a tax-deductible expense. In that case, the payments must be treated as a loan from the company to the director.

Generally, companies are not allowed to provide loans to their directors. However, a 10% exemption specifies that the loan’s value must be less than 10% of the company’s relevant assets.

10% Rule

If the loan value represents less than 10% of the sum of everything the company owns (assets) minus the costs of all the company's debts (liabilities), a company can give a director a loan.

The company must ensure that it does not breach the 10% rule, as doing so may result in fines and penalties for the director and make them personally liable for all the company's debt.

Implications of a company lending money to a director

  • Interest is charged on a loan owed by a director

    Even if a company does not charge interest on the loan, the director will still have to pay interest at 4% (if used to purchase a home) or 13.5% (all other loans). The director must pay the interest via a director's Income Tax Return.

  • What happens if the company waives the loan?

    If the company writes off the loan, the written-off amount will be assessed as the director's income and subject to income tax.

  • Income tax (the company is liable)

    The company has to include the directors' loan as a part of its Corporation Tax Return and pay tax at 25% of the loan amount before the deadline. If the loan is repaid within four years, the company can request a refund of the income tax paid.

How can we help?

A directors’ loan can be an effective way to infuse cash into a company. However, exercising caution and seeking professional advice before taking or making a loan is essential. This is particularly important when the company or director is experiencing financial difficulties. By understanding directors’ loans’ legal and tax implications, companies and directors can make informed decisions about their finances and cash flow management and ensure compliance with relevant regulations.

Our team of chartered and certified accountants are on hand to support your business and answer your queries – reach out to us today.

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