Q. I borrowed some money from my company to lend to my brother. He is
paying it back in monthly instalments over three years. I am the sole director
and shareholder of the company and I am not charging my brother interest on the
loan. Are there any tax implications I need to consider?
A. The tax implications for the company are that the loan is deemed to have been made to an associate of a participator in the company, and as such, it will be caught by what are commonly referred to as the ‘section 455 rules’. Broadly, these rules mean that the company will have to pay tax at 32.5% on the amount of the loan outstanding nine months after the accounting year end of the company. When the loan has subsequently been repaid to the company, HMRC will refund the tax paid.
There is an exception to this, namely where a loan does not exceed £15,000, but only when the shareholder does not own more than 5% of the shares.
If an employee of a relative of an employee receives an interest-free loan from an employer, this will be a benefit-in-kind for the employee. Interest at the ‘official rate’ (currently 2.5%) is calculated, and this deemed interest is subject to tax. However, there are exceptions to this tax charge where:
– the loan is a ‘qualifying loan’;
– a qualifying or non-qualifying loan is less than £10,000; and
– the employee can show that they received no benefit from the loan to the relative.