Can a Limited Company Lend Money to an Individual?

If you’re considering borrowing money from your own limited company or thinking about lending money to someone else from your business, make sure you read the following guide first. 

It can get messy. If a limited company is lending money to an individual other than yourself as a director, there are implications you need to consider before borrowing money or issuing a loan. 

Can a limited company lend money to an individual? Yes, a limited company can lend money to an individual, but there are tax implications plus rules regarding how the money is loaned and what for. You can also borrow money yourself from your company.

There are two different scenarios here:

1. You are borrowing money from your limited company as a director or…
2. Your company lending money to a private individual who is not a director.

In this guide, we will examine both, and explain what the risks and legal obligations are.

1. Can I borrow money from my limited company?

A director of a limited company can borrow money from the business via a director’s loan. 

A director’s loan is when you (or other close family members) borrow money from your limited company that is not:

• A salary, dividend, or expense repayment.
• Money you have previously paid into or loaned the company.

You must keep a record of any money you borrow from or pay into the company – this record is usually known as a ‘director’s loan account’.

Tax on loans

You may have to pay tax on director’s loans. Your company may also have to pay tax if you are a shareholder (sometimes called a ‘participator’) as well as a director.

If you owe your company money

You or your company may have to pay tax if you take a director’s loan as the vehicle for borrowing money from your limited company.

Your personal and company tax responsibilities depend on how the loan is settled. You also need to check if you have extra tax responsibilities if:

• The loan was more than £10,000 (£5,000 in 2013-14).
• You paid your company interest on the loan below the official rate.

	Your company’s responsibilities if you’re a shareholder and director.	Your personal responsibilities when you get a director’s loan.
You repay the loan within 9 months of the end of your Corporation Tax accounting period.	Use form CT600A when you prepare your Company Tax Return to show the amount owed at the end of the accounting period. If the loan was more than £5,000 (and you took another loan of £5,000 or more up to 30 days before or after you repaid it) pay Corporation Tax at 32.5% of the original loan, or 25% if the loan was made before 6 April 2016. After you permanently repay the original loan, you can reclaim the Corporation Tax – but not interest. If the loan was more than £15,000 (and you arranged another loan when you repaid it) pay Corporation Tax at 32.5% of the original loan, or 25% if the loan was made before 6 April 2016. After you permanently repay the original loan, you can reclaim the Corporation Tax – but not interest.	No responsibilities.
You do not repay the loan within 9 months of the end of your Corporation Tax accounting period.	Use form CT600A when you prepare your Company Tax Return to show the amount owed at the end of the accounting period. Pay Corporation Tax at 32.5% of the outstanding amount, or 25% if the loan was made before 6 April 2016. Interest on this Corporation Tax will be added until the Corporation Tax is paid, or the loan is repaid. You can reclaim the Corporation Tax – but not interest.	No responsibilities.
The loan is ‘written off’ or ‘released’ (not repaid).	Deduct Class 1 National Insurance through the company’s payroll.	Pay Income Tax on the loan through a Self-Assessment tax return.

If the loan was above £10,000

If you’re a shareholder and director and you owe your company more than £10,000 (£5,000 in 2013 to 2014) at any time in the year, your company must:

• Treat the loan as a ‘benefit in kind’.
• Deduct Class 1 National Insurance.

You must report the loan on a personal Self-Assessment tax return. You may have to pay tax on the loan at the official rate of interest.

If you paid interest below the official rate

If you’re a shareholder and director, your company must:

• Record interest you pay below the official rate as company income.
• Treat the discounted interest as a ‘benefit in kind’.

You must report the interest on a personal Self-Assessment tax return. You may have to pay tax on the difference between the official rate and the rate you paid.

Reclaim corporation tax

Your company can reclaim the Corporation Tax it pays on a director’s loan that’s been repaid, written off or released. You cannot reclaim any interest paid on the Corporation Tax.

Claim after the relief is due – this is 9 months and 1 day after the end of the Corporation Tax accounting period when the loan was repaid, written off or released. You will not be repaid before this.

You must claim within 4 years (or 6 years if the loan was repaid on or before 31 March 2010).

If you’re reclaiming within 2 years of the end of the accounting period when the loan was taken out, use form CT600A to claim when you prepare a Company Tax Return for that accounting period or amend it online.

Can a director’s loan be written off?

But what if you can’t repay the money you borrowed from the limited company? 

Believe it or not, a director’s loan can be written off. It will be waived as a liability, with the loan amount written off treated under Income Tax (Trading and Other Income) Act 2005 as a deemed dividend. This will create a personal tax liability, but it will be less than having to repay the loan.

Your limited company will not receive corporation tax relief on the amount you borrowed from the business once the loan is written off. Any loan written off will impact the profitability of the business as it will reduce any profit the business has made in the financial year it is written off.

2. Can a limited company lend money to an individual   

Now for the second scenario whereby your limited company could lend money to a private individual who is not involved with the business.

This question often pops up, with some business owners exploring whether their limited company lend money to a friend or family member.

In simple terms, yes, a limited company can lend money to an individual such as a friend or family member, but it should be very carefully considered.

To keep your business safe from breaking any tax law, the interest rate (if you do decide to charge one) must be at or below the market rate. You will also need to make sure that when you loan money, it doesn’t put your limited company at risk if the borrower defaults.

You should also be aware that when you loan money from your limited company to an individual it must be for a legitimate business purpose. 

There’s always the potential for the loan to go wrong if your relationship with the friend or family member changes.

Think carefully about what the impact will be if your limited company struggles to get the loan repaid by the borrower. 

So, to summarise, yes, you can loan someone money from your limited company when they are an individual, but it can get messy and complex.

FAQs on limited companies lending money to individuals

Can I borrow money from my company to buy a house?

Technically yes, you could borrow money from your company to buy a house. You would need to factor in whether the company has the funds to meet its other obligations. 

Any loan agreement documents that need to be drawn up, especially what would happen if you could not make repayments – what happens to the property?

Whether you would want to borrow money from your company to buy a house is another matter. Unless this was a short-term loan the tax costs of structuring such a deal would probably outweigh any benefits.  

If you are unable to get a mortgage however then it could be worth considering. Calculations of the total costs including the tax liabilities need to be reviewed.

Another consideration is whether the company buys the house rather than lending you the money. 

If an employer provides accommodation for employees, directors or a member of an employee’s or director’s family or household with living accommodation, a benefit in kind can arise in relation to the accommodation and the associated benefits. 

This could offer a much more viable solution.

Can I borrow money from my company to buy a car?

Yes, you could borrow money from your company to buy a car. The money you borrow would be entered into the accounting records as a director’s loan.

For director loan balances over £10,000, there will be a benefit in kind. Tax and national insurance charges will apply.

Handy Hint: We’ve written an extensive guide explaining how best a business can buy a car.

If the director’s loan account is not repaid within 9 months of the corporation tax accounting period, the company will also be liable for a 32.5% tax charge which is repayable when the loan is repaid in full.

A simpler, cheaper, and easier alternative may be for the company to buy a car. You will pay a benefit in kind for the use of the car, but the company will pay all costs associated with the car.

Before making any decisions do a comparison of the potential costs to see what works best overall.

Conclusion

In conclusion it is possible for a limited company to lend money to an individual. This can either take the form of you borrowing money from your own limited company, or your business loaning money to a private individual.

Is it wise though?

Well, this all depends on affordability and your approach to risk…

Above all though, make sure you adhere to the rules and tax implications to help protect yourself from being investigated by HMRC.

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• How to put your own money into a business

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