If you have a limited company holding property, you almost certainly have a director's loan account. Most landlords have never had it explained, and it is the single most common thing we find in a tidy-up.
What it actually is
It is a running record of money that moves between you and your company that is not a salary and not a dividend.
Money leaves the company for a personal cost. You put your own money in to cover a deposit. A card gets used for the wrong thing. Each of those movements lands in the director's loan account, and the balance tells you one of two things:
- The company owes you money, because you have put more in than you have taken out.
- You owe the company money, because you have taken more out than you have put in.
The first is fine, and often useful. The second is where it gets expensive.
What it costs when it drifts
If you owe the company money at the year end and you have not repaid it within nine months and a day of that year end, HMRC charges the company additional corporation tax on the outstanding balance.
You do get that money back once the loan is repaid. But you can wait a long time for it, and in the meantime the cash has gone out of the business. If the loan goes over a certain size and you are not paying interest on it, there is also a benefit in kind to report.
None of this is a penalty for doing something wrong. It is simply what happens when nobody is watching the balance.
What to do instead
Three things, none of them difficult:
- Know the number. Your director's loan balance should be something you could say out loud at any point in the year, not something you discover in a letter.
- Keep personal spending off the company card. This is the single biggest cause, and fixing it also makes your year end accounts much faster to prepare, which matters when a broker is waiting on them.
- Decide how you are taking money out before the year starts, not after it ends. Salary, dividends and the loan account work together, and by the time the accounts are being prepared most of the useful options have expired.
If you are not sure where yours stands, that is a normal place to be, and it is a short conversation rather than a big project.