There are various circumstances in which an individual might lend money to a family member. For instance, a parent may choose to lend money to an adult child to help with a property deposit. If the parent owns a personal or family business and there are retained profits within the company, it may appear more logical for the company to provide the loan, rather than the individual doing so personally. However, this approach can come with tax implications that are often overlooked.
Loans to Participators
If the company is a close company—generally one that is controlled by five or fewer individuals, as is the case with most personal and family businesses—it’s important to consider the rules surrounding loans to participators. Under these regulations, a tax charge will apply to the company if any portion of the loan remains unpaid for more than nine months and one day after the end of the accounting period in which the loan was made.
This charge, known as the ‘section 455 charge,’ is calculated at a rate of 33.75% on the remaining loan balance. This rate mirrors the highest dividend tax rate.
Associates
The scope of the loans to participators rules is extensive. The tax charge does not solely apply when the loan is made to a participator (generally a shareholder); it also extends to situations where the loan is provided to an associate of the participator. This definition includes relatives such as a spouse or civil partner, parents, grandparents, or further ancestors, as well as children, grandchildren, or their descendants, and siblings. Additionally, the charge applies if a loan is made to a partner of the participator.
Example of Loans to Family Members and the Section 455 Charge
James is the director and sole shareholder of his personal company, J Ltd. The company lends £100,000 to James’ son, Oliver, to assist him in purchasing his first property. The loan is interest-free and is made on 1 January 2025.
J Ltd prepares its accounts up until 31 March each year. If the loan remains unpaid by 1 January 2026, as expected, the company will be required to pay the section 455 tax of £33,750 on 1 January 2026.
This tax will be refunded nine months and one day after the end of the accounting period in which the loan is repaid, meaning it is effectively a temporary tax. However, it could represent a substantial cost to the company during this interim period.
Benefit-in-Kind Charge
If the loan balance exceeds £10,000 at any time during the tax year, a benefit-in-kind charge will apply, as the loan is made to a member of the director’s family or household. The charge is calculated based on the difference between the interest payable at the official rate and the amount actually paid, if any. Additionally, the company will be liable for Class 1A National Insurance on the taxable amount.
Planning Considerations
It’s possible to make a loan of up to £10,000 from a personal or family company for up to 21 months without triggering any tax liabilities. However, tax consequences arise if the loan exceeds this amount or is extended for a longer period.
This doesn’t mean that lending to a family member is never advantageous—it simply requires weighing the costs of paying the section 455 tax and having the associated funds tied up until the loan is repaid, against the interest the family member might have to pay if they were to borrow from another source. The section 455 tax is refundable once the loan is repaid, whereas any interest paid on a third-party loan is non-refundable. The cost of the benefit-in-kind charge should also be taken into account when making this decision.
It’s important to make sure all bookkeeping transactions between family members are treated correctly and the correct reports are made to HMRC on time. Using Xero or FreeAgent software can help keep track of these too. We’re happy to advise on implications of making family or directors loans and reporting and disclosure requirements. If you need assistance in completing returns and accounts, contact us today on 01257 827029 or info@somosaccounting.com
