How to get tax relief on a Directors loan account

by | Jun 12, 2020


(Director’s Loans of £350,000+)

There are many situations where a Director will end up ‘loaning’ money to their own business. Indeed when a property portfolio is incorporated, there may be many hundreds of thousands of pounds ‘loaned’ – and owed back to the Director(s).

Everyone knows that these Director’s Loans can be repaid as return of capital – and therefore tax free. But did you know that there is a way to use large Director’s Loan Accounts (£350,000+) to reduce the corporation tax liability of the company who owes the money back to the Director? Not many do know this – but here is how:

Image that a Director has loaned £500,000 to their Limited Company. They have been advised by their accountant that they are free to draw down the loan as tax exempt repayments at any time. The same accountant would have (quite correctly) advised them that these payments are deemed to be ‘return of capital’ and as such are not allowable expenses which reduce the profits of the business. If the Director charges interest on their loan, the interest portion of the repayment will be an allowable expense – but of course the Director will pay income tax on the interest (except for the first £1,0000 which is tax free).

The loan of £500,000 is technically an ‘asset’ which can be moved as a ‘contribution’ into a special type of pension called a QNUPS (Qualifying Non-UK Pension Scheme). When this happens, the QNUPS becomes the entity that is now ‘owed’ the £500,000 debt. The QNUPS can also charge interest on the loan – which will (as we have already explained) be an allowable deduction from profits within the company. This reduces the corporation tax paid. The best bit is – the QNUPS pays 0% tax on interest, so there will be zero tax on the interest and the QNUPS will be able to accrue the money without any tax. 

Based on 8% interest, and £500,000 owing to the QNUPS – the company could pay £40,000 a year interest and get a perfectly valid tax deduction – without any additional tax to pay within the QNUPS. Over 10 years, that’s £400,000 of tax relief on a £500,000 debt. As good as a pension – which they can ALSO do!

Another advantage of the QNUPS owning the debt is that it can re-invest funds into a wide range of investments – and pay no income or capital gains tax. The funds are ALSO outside of the Director’s estate, saving them a further 40% of Inheritance Tax.

Bet you didn’t know that one! 

Most Advisors, such as IFA’s and Accountants do not have the internal experts to assess a client’s FULL situation – and come up with the best overall strategy.

As I have worked in the pensions and tax planning field for over 30 years, I have personal access to experts in all taxes and can combine these experts into a unique service that really does go beyond what you’d get from your normal ‘Advisors’.

Every wealthy entrepreneur or property investor I have ever met had their own Accountant, Solicitor and Financial Advisor – yet in 90% of cases we were able to dramatically able to improve their overall exposure to UK taxes and access to their pension money.

What is vital is the proper implementation – with care at every stage.

This is why we offer a FREE consultation – as it lets us explore your current situation before jumping in with ‘solutions’.

If you are interested in seeing if your pension can be used to help support your business – then call us now, or send us your details and we will call you back. 

We look forward to helping you soon.