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Directors' Loan Agreement

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Mark,
29 December, 23
The solicitor who was appointed to me was outstanding
Very simple to engage with instant confirmation in writing straight after. Daniel, the solicitor who was appointed to me, was outstanding in his approach, his understanding of the technicalities of the law and, crucially, a genuine care for the client. Would definitely advise using Lawhive, you won't regret it.
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04 October, 23
We were so pleased to find the Lawhive website
After struggling to find a solicitor willing to give us advice, and for a reasonable cost, we were so pleased to find the Lawhive website. At first we wondered how well it would work, but needn't have worried at all - the whole process was simple, straightforward and professional and great value for money. We felt extremely lucky to be matched with our solicitor, Sonay Erten, as she was exactly what we were looking for - knowledgeable, patient and kind - a refreshing change from solicitors we have used in the past. She showed a great deal of empathy for our situation and explained things in language that was easy to understand (rather than the usual "solicitor" talk, which can be intimidating). She's a shining example of what a solicitor should aspire to be and I wouldn't hesitate to recommend her to others or use her again in the future. We came out of our session reassured and confident of what we needed to do going forward, so a big "thank you!"
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I got the outcome I wanted regarding cease and desist to a competitor spreading defamatory statements about my business. Fast and professional, and at a much lower price than high street firms. Highly recommended thanks.
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23 July, 23
Very efficient! Can highly recommend.
I found the website very easy to use. Quick responses and I was even able to talk to someone who was friendly and competent. She rang me rather than emailed me. A solicitor was quickly found who could help me and once the relevant identification was approved he started work. Within two days the solicitor had checked documents and commented on them. Very efficient! Can highly recommend.
Pauline Piper,
15 February, 23
The service was fast and ultra professional
Sonay was really informative and understood my questions instantly, what I thought was complex Sonay simplified massively. She regularly checked in and the service was fast and ultra professional. Would highly recommend.
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09 November, 23
Great service and very reasonably priced,
Great service and very reasonably priced, Kem was really helpful and professional. Would use again
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21 November, 23
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About

A Directors' Loan Agreement is a legally binding contract between a company and its directors. The agreement allows the directors to borrow money from the company, and gives the directors the right to repay the loan at any time. Solicitors can ensure these contracts meet the aims of the company and its directors.Next steps

How much does a Directors' Loan Agreement cost?

The cost for a licensed solicitor to help with a Directors' Loan Agreement is dependent on many factors including the complexity and specific requirements of the case. On average it is expected to range from £200-£400 but in some cases it could cost as much as £800.

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Director's Loan Agreements and Accounts

Director’s loans are a fundamental aspect of business finance. They’re essential for maintaining transparent financial records and ensuring compliance with legal and tax regulations. 

At Lawhive, our network of expert corporate lawyers is on hand to provide tailored guidance and assistance on director’s loans and director’s loan agreements to make sure you understand your rights and obligations.

Contact our legal assessment team today to find out more and get a fixed-fee quote. 

What is a director’s loan and how do they work?

A director’s loan is any money you or close family members, receive from your company that doesn’t fall under salary, dividends, or expense reimbursements. However, it doesn’t include funds you’ve previously invested in or loaned to the company. 

Director’s loans can also work the other way for example, if a director lends money to the company.

What is a director’s loan agreement?

A director’s loan agreement is an agreement between a company and its director that lets the company lend money to the director for various business purposes, like providing an alternative to paying a salary or funding other essential business needs. 

You must have a director’s loan agreement before money moves between the company and a director. The agreement should outline the terms and conditions of the loan, as with any personal loan agreement, including repayment terms and interest rates if they apply. 

What is a director’s loan account? 

A director’s loan account is a record of any money a director borrows from or pays into the company. It must show all cash withdrawals made from the company and all personal expenses paid with the company’s money. 

At the end of the company’s financial year, one of two things can happen:

  1. A director owes money to the company

  2. The company owes the director money. 

Do you have to pay interest on a director’s loan? 

Interest on a director’s loan is not automatic. It depends on the agreement between the director and the company. Some director’s loans are interest-free, while others may have an interest rate attached. 

If there is interest, it should be agreed and documented in the director’s loan agreement. The current HMRC director’s loan rate in use is 2.25%. 

If the loan is interest-free or has a low-interest rate, HMRC may treat the forgone interest as income and tax it accordingly. 

Should a director’s loan be secured against a property or asset? 

While not a requirement, it’s wise to secure a director’s loan against a property or asset. This can be done with the help of a solicitor by registering a second charge on a property owned by the company at the Land Registry. You will, however, need to get the primary lender’s consent to do this if there’s already a mortgage or loan on the property. 

Do you have to pay tax on a director’s loan?

Both directors and their company may have to pay tax on a director’s loans. More specifically, directors may need to pay income tax, while companies may be liable to pay: 

  • Corporation tax

  • National Insurance contributions

Do director’s loans have to be paid back? 

Director’s loans have to be paid back, even if the company runs into financial trouble. Unless there’s a different agreement in place, the company can ask for repayment of a director’s loan at any time.

If you’re a shareholder, you may be able to use dividends to repay a director’s loan, but if there’s not enough money to cover it, you still have to repay the loan. 

If a director’s loan isn’t repaid when requested, formal steps may be necessary to recover it. An overdrawn Director’s Loan Account is seen as a company asset and during insolvency, the officeholder will pursue repayment to benefit the company’s creditors.

How much can I borrow as a director’s loan?

A director’s loan can be given for any amount. However, if a director is not also a shareholder, they need permission from the shareholders before borrowing over £10,000. If they don’t get permission and still take the director’s loan, it could be seen as doing wrong or even stealing. 

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How long do I have to pay back a director’s loan?

You have to pay back a director’s loan within nine months and one day after the company’s year-end. If you don’t, you could face a hefty tax penalty. 

What is the 30 day rule for director’s loans?

The 30-day rule for director’s loans is: if you repay a loan from your company and then borrow the same or a similar amount within 30 days, the repayment is disregarded for tax purposes. 

What is the 9 month rule for director’s loans?

If you borrow money from your company and pay it back within 9 months plus one day after the end of the financial year, the company shouldn’t have to pay extra tax on that loan. 

If you don’t repay the loan within the given time, HMRC may charge extra tax on it. This is to prevent people from using loans instead of dividends to avoid tax.

Is a director’s loan a good idea? 

Director’s loans can offer flexibility for managing personal and business cash flow needs. They can also offer some tax efficiencies. What’s more, in emergencies, they could provide a quick solution. 

No one can tell you if a director’s loan is a good idea without knowing your full circumstances, however, a corporate lawyer can certainly help you understand the responsibilities and implications of entering into a director’s loan agreement

To get help with this, contact us today

What are the disadvantages of a director's loan? 

Like any loan, director’s loans come with risks: 

  • If you don’t repay an overdrawn director’s loan within the agreed timeframe, your company may have to pay a hefty Corporation Tax bill. 

  • An overdrawn director’s loan can be considered a benefit in kind, meaning you’ll face income tax and National Insurance implications. 

  • It’s possible to get stuck in a cycle of owing your company money you can’t repay, leading to financial strain. 

What happens if I can’t pay off a director’s loan?

If you can’t repay your director’s loan, a liquidator might try to get back the money owed, especially if there are enough assets to cover costs and help creditors. 

If the company is facing a winding-up petition from a creditor, the official receiver might accuse you of wrongful trading or misfeasance, which can lead to severe consequences like being banned from being a director.

Can I write off a director’s loan?

You can write off a director’s loan. To do so, the company must officially declare (using a formal waiver) that it won’t collect the debt anymore and the director must report the written-off amount when filing their personal tax return. 

Once the loan is written off, HMRC may consider the written-off loan as a type of salary, so the company might have to pay National Insurance contributions. What’s more, the company won’t be able to reduce its Corporation Tax by the amount of the written-off loan. 

Get help with Directors' Loan Agreements from Lawhive 

At Lawhive, our network of corporate law solicitors can support negotiations regarding directors’ loan agreements and accounts, as well as bring and defend claims about DLAs. 

For more information, contact our legal assessment team today to request a callback. 

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