Loans from Personal Company to Family Member – Know the Tax Rules
loans from personal company to family member, Thinking of lending money from your personal or family company to a relative?
It may seem like a smart move if there are extra funds in the business.
But there are tax rules that you should not ignore.
At Khoob Accountancy, our French speaking accountants in London help clients understand how
loans from personal company to family member work and what to watch out for.
Loans to Participators – What It Means
Most small or personal companies are “close companies”.
These are firms controlled by five or fewer people.
If such a company gives a loan to a participator (usually a shareholder), a tax charge may apply.
This tax is called the section 455 charge. It applies if the loan is still unpaid nine months
after the end of the accounting year when the loan was made.
How Section 455 Tax Works
The tax rate is 33.75% of the unpaid loan. This is the same rate as the higher dividend tax.
The good news? The tax is refunded once the loan is fully repaid. But the wait may be long.
So it’s important to plan ahead.
Loans to Family Members – Not Just Shareholders
The participator loan rules also cover loans made to family members and other associates.
The person borrowing doesn’t need to be a shareholder.
This includes:
- Spouses or civil partners
- Parents, children, grandchildren
- Siblings and in-laws
- Partners of shareholders
Example: Loan from Director to Daughter
Louise is the only shareholder and director of L Ltd. On 1 Jan 2025, her company lends £100,000 to her daughter Sophie.
The loan is interest-free and unpaid by 1 Jan 2026.
L Ltd prepares accounts to 31 March. Since the loan is still unpaid 9 months after the end of the 2024/25 year,
L Ltd must pay section 455 tax of £33,750.
This amount will be refunded only after Sophie repays the loan in full.
Until then, it’s money tied up with HMRC.
Benefit in Kind on Director or Family Loans
If the loan goes over £10,000 at any time during the tax year, a benefit in kind (BIK) arises.
This applies if the borrower is a family member living in the director’s household.
The taxable benefit is based on the interest saved compared to the official HMRC rate.
The company will also owe Class 1A National Insurance on that amount.
Small Loans – Are There Any Tax-Free Options?
It’s possible to make a loan up to £10,000 for up to 21 months without any tax charge.
But anything larger or longer will trigger tax consequences.
You should consider:
- Can your company afford to pay section 455 tax temporarily?
- Would the family member save more in interest than what the company pays in tax?
- How long will it take to repay the loan?
- Is there a benefit in kind risk?
Planning Loans to Family – Talk to Khoob Accountancy
Making a loan from company to child or spouse can be useful,
but it’s important to plan the details carefully.
We help clients in London, Kensington, Barnet, and beyond handle these issues the right way.
Whether you need help with employment tax and payroll,
personal accounting consultancy UK, or
virtual accounting services, we’re here to help.
Our team of experienced french speaking accountants in London can guide you through
director loan rules, tax planning, and family lending strategies.
