Shareholder loans to company
November 2006 Tax Newsletter
There are certain circumstances when it may be more expedient for a shareholder to lend money to the company rather than the company borrow money from its bankers. The shareholder could use his own savings or borrow funds to do this. If funds are borrowed we have listed below some of the conditions that must be met in order that the shareholder obtain tax relief on interest paid.
1. The shareholder must own over 5% of the ordinary share capital of the company, or have worked for the majority of their time in the actual management of the company.
2. The company must be a private company that meets specific criteria to qualify as a "close" company, and be a trading concern or involved in the letting of property to unconnected parties.
3. Tax relief will be denied to the shareholder if he funds the loan to the company by means of an overdraft. Interest is only allowed if charged to a loan account.
4. In order to obtain full tax relief the shareholder must have sufficient taxed income to cover the interest paid. If the interest is more than total taxed income the excess cannot be carried forwards to be set off in future years, or carried back to previous tax years.
In the event that the company is unable to repay the loan made by the shareholder the amount of the loss can be claimed for capital gains tax purposes. (CGT relief will only be allowed if the company applied the loan for the purposes of its trade.) This relief is also available to guarantors. For instance if a shareholder provided a personal guarantee to the company's bankers, which was called upon, then the amount paid to the bank would qualify as a capital loss.
If the shareholder is also a director care must be taken when funds are withdrawn to reduce an existing director's loan. Tax relief on the funding for the later shareholder loan may be reduced or lost completely.
