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S455 - Bed & Breakfasting & Dividends

Are dividends credited to directors overdrawn loan account exempt from bed / breakfast rules?

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If a director’s loan account is overdrawn by, say £50k, at year-end and then in the following nine months the following occurs:

  • Cash of £30k in total is withdrawn in £1k or £2k increments over the nine months and debited to DLA,
  • Interim Dividend of £30k is declared before the nine months is up.

Can this dividend be treated as repayment of £30k of the previous year-end overdrawn DLA?

I know that the bed and breakfast rules do not apply to a repayment that gives rise to an income tax charge on the director shareholder (which the dividend will) but this exemption doesn't apply if the dividend is paid out in cash to the director shareholder.

So my question is, has the £30k dividend “been paid out in cash” or is it only “paid out in cash” if is actually paid when declared?

Sorry if this is dumb question. I had assumed that S455 charge in above example would apply to the whole £50k, as the net movement on the DLA in the following nine months is NIL, but now I am thinking £30k can be treated as repaid?

Replies (3)

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By johngroganjga
28th May 2020 22:01

The loan is cleared by the dividend on a FIFO basis.

Thanks (1)
Replying to frankfx:
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By ChrisKM
29th May 2020 14:53

frankfx wrote:

https://www.accountingweb.co.uk/any-answers/dividends-to-clear-overdrawn...

https://www.taxinsider.co.uk/directors-loan-accounts-allocate-your-repay...

useful?

Very; thank you; and thank you to John too.

I guess my uncertainty is regarding whether HMRC could ever argue a dividend was still subject to the bed and breakfsting rules i.e. because they considered it to be paid out in cash.

Seems like ensuring the dividend is always credited to the loan account (even if then paid out) makes it pretty watertight.

Thanks again.

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