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Directors' Loan Accounts and Divorce

At Davidsons Forensic Accountants, we deal with many issues arising in Divorce matters and one of the most frequent is that of Directors’ Loan Accounts. We set out below some of the recurring questions we are asked in relation to Directors’ Loan Accounts.

How do they affect the value of a Business?

Directors’ Loan Accounts can be overdrawn and in credit. They affect the value of a Business in different ways.

The two most common ways of valuing a controlling interest in a business are:

  1. The capitalised future maintainable earnings method (earnings before interest, tax, depreciation and amortisation (EBITDA) or post-tax profits), and
  2. The net assets method

When considering the value of a business on a maintainable earnings basis, the balances on directors’ loan accounts would not generally affect the value of the business unless they were overdrawn and were considered to be surplus assets i.e. assets not required to generate the maintainable earnings of the business. In this case, consideration would need to be given as to whether their book values are likely to be realised. If they are considered to be realisable surplus assets, then these would increase the value of the business.

If the director’s loan account is in credit, and it is providing long term loan finance for the company and the company is being valued as a multiple of EBITDA, the credit balance would need to be considered together with any other long term loan finance in arriving at the value of the share capital of the company. i.e. EBITDA value less long term loan finance.

If adopting the maintainable earnings basis for valuing a business and no interest has been payable on directors’ loan accounts in credit and no interest has been charged on those overdrawn, it may be appropriate if considered significant to make an adjustment for such interest in arriving at the maintainable earnings of the business.

If the business is being valued on a net asset basis, directors’ loan accounts will form one of the assets or liabilities of the business. If it is an asset i.e. an overdrawn directors' loan account consideration would need to be given as to the likelihood of it being repaid and therefore whether its book value is likely to be realised.

What tax is payable on them?

When directors’ loan accounts are overdrawn, there are tax implications for both the director and the company. This is a complex area of tax and what follows is only intended to be a general outline of the current tax position. In particular, HMRC are keen to ensure that a tax or National Insurance Contribution advantage is not obtained by the use of overdrawn directors’ loan accounts. Over the years, various anti-avoidance measures have been put in place.

In the case of the director, if the overdrawn balance exceeds £10,000 and the loan is not for a qualifying purpose (such as for buying shares in a close company), there will be a benefit in kind equivalent to the official rate of interest on the loan (currently 2%) less any interest which the director may have actually paid to the company on the loan. The amount calculated i.e. the benefit in kind will be subject to Income Tax on the director and the company will be liable to pay Class 1A National Insurance Contributions(NIC) thereon.

As far as the company is concerned, if the overdrawn director’s loan is not repaid within nine months of the end of the company’s Corporation Tax accounting period, the company will have to pay Corporation Tax at 32.5% on the balance outstanding. This Corporation Tax will be repaid following the repayment of the loan or it being written off or released. HMRC have introduced detailed rules in order to determine when a loan is repaid. These are intended to combat the position whereby a loan was repaid one day but replaced with a new loan the following day or shortly thereafter, commonly referred to as ‘bed and breakfasting’.

If the overdrawn directors' loan account is not repaid but is written off or released by the company, the director will be liable for Income Tax on the outstanding balance and the company will not be able to claim the amount written off as an allowable expense in calculating its Corporation Tax liability. In addition, the company will be liable for Class 1 NICs in respect of the amount written off.

If a directors' loan account is in credit, then there will only be tax consequences if the company pays the director interest on the loan. The interest paid to the director will form part of the director’s taxable income for Income Tax purposes and the company will be able to claim the interest paid as an allowable expense in calculating its Corporation Tax liability.

When should they be repaid?

As to when directors’ overdrawn loan accounts should be repaid, there are no specific rules and generally this will depend upon the director’s ability to repay or to the company being able to vote a bonus or dividend to cover the overdrawn balance. If the company wishes to avoid the aforementioned 32.5% Corporation tax charge on the overdrawn balance, then the balance should be repaid within nine months of the end of its Corporation Tax accounting period, but beware of the aforementioned ‘bed and breakfasting’ rules regarding loan repayments.

If a company is being sold, then it would normally be the case that the directors’ loan accounts would be repaid before or on completion of the sale. 

If you come across any issues in relation to Directors’ Loan Accounts or other financial matters in relation to Divorce Proceedings, please contact us at Davidsons Forensic Accountants by emailing us at or calling 0113 4831127.

About the author

Raymond Davidson

Raymond has been specialising in Forensic Accounting and Litigation work for over 30 years, is a Fellow of the Institute of Chartered Accounts in England and Wales and trained by the Academy of Experts to act as a Mediator.



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