Overdrawn Directors' Loan Accounts: the implications of a "write off"
When a business is on the road to being wound up, Insolvency Practitioners will look at all debts due (including Overdrawn Directors’ Loan Accounts), and seek a commercial settlement – sometimes leading to the debt being written off (in full, or part). Whilst this reduction of the directors’ debt is an obvious benefit to the director, there are other potential consequences that need to be considered.
Whilst the Director saves on having not to repay the full amount (the amount “written off”), the insolvency practitioner will not formally write the loan balance off in any accounts, however the director still has a duty to advise HMRC (via their accountant) of the “benefit” obtained in not making repayment in full. This can result in the loan account balance being charged as income and an income tax liability being generated against the director personally.
Depending upon the director’s earnings this tax charge can be as much as 40%-45% of the write off amount and result in a significant personal tax liability which the director will have to find, or risk being pursued (potentially to bankruptcy) by HMRC.
It is imperative that potential matters like this are addressed as early as possible so that a decision can be made based upon an understanding of the entire picture and a thorough understanding of insolvency proceedings.
This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.
The information was correct at time of publishing but may now be out of date.