Personal loan for use by the company

Personal loan for use by the company

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I have a company client that needed to raise some finance but was unable to do so in the company name. A director therefore took out a personal loan and put all the capital raised into the company bank account. The company pays all the repayments on the loan.

How should this be treated within the accounts?

1. The repayments are treated as directors loan repayments and no interest is allowable.

2. The loan interest is allowble on the company and the loan is shown on the balance sheet.

3. The loan interest is allowable on the company but the loan balance is shown included within the directors current account balance.

4. The interest is treated as interest payable to the director (presuably tax would have to be accounted for on CT61) and the director has to account for this receipt set off against the interest paid to the loan company on their personal tax returns?

Thank you in advance for any help or thoughts.

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By Euan MacLennan
15th Dec 2011 12:36

Do it right

The interest paid on a personal loan to the director is not allowable as a business expense of the company, so options 2 & 3 are wrong.  Option 1 is correct enough, but not tax efficient.  Option 4 is the closest, but it needs to be set up properly.

The company should pay the director interest on his loan to the company, deducting income tax at 20% and paying it over quarterly to HMRC with a CT61 return.  The director pays the interest on his personal loan without deducting tax and discloses both the receipt of interest (and tax deducted) from the company and the interest paid on the qualifying personal loan (restricted if the balance of his loan to the company is less) on his tax return.  His PAYE code will be amended to allow for the interest he pays.

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Replying to Zebedee Zibidad:
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By ticklebug
15th Dec 2011 20:44

Thank you.

It is great to have what I thought was correct confirmed. Really reassuring when you are a comparatively new sole practitioner.

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