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What happens to an overdrawn director’s loan if I move abroad?


Will the director’s loan be written off?

An overdrawn director’s loan account occurs when a director takes money out of a company that’s not in the form of a salary or dividend, and it’s more than the money they have invested in the business. Effectively, they give themselves a personal loan from the company.

Director’s loans are perfectly legal and relatively common, but you do have to repay the money. The overdrawn director’s loan will become an asset on the company balance sheet and moving abroad is not an effective way to escape it.

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Why might you have an overdrawn director’s loan?

A company director might use this type of loan to cover one-off expenses or unexpected bills, as it’s a way to access money that’s not a salary or dividend quickly. For loans over £10,000, directors must get shareholder approval, although that’s a formality where a director is also a controlling shareholder.

Although it might seem like an easy option, a director’s loan involves a fair amount of admin and comes with added risks and tax issues. It can also put a strain on the company’s cash flow. That’s why it’s better used sparingly rather than as a ready source of income that you dip into routinely.

When do you have to repay a director’s loan?

As your director’s loan account is overdrawn, you will have to pay the money back. You must keep records of all the relevant transfers and amounts and repay the company within nine months and one day of its financial year-end. Any outstanding balance after that time will be subject to a hefty 33.75% Corporation Tax charge. You can claim that back once you have fully repaid the loan, but it can be a lengthy process. HMRC will also charge the company interest on the outstanding amount.

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What happens if I cannot afford to repay a director’s loan?

Problems arise with overdrawn director’s loans if you cannot repay what you owe. One option is to issue a dividend payment that’s large enough to clear the overdrawn director’s loan account.

However, you cannot issue dividends if the company does not have sufficient reserves to do so. That would be an example of an unlawful dividend, and you may have to repay the money if the company enters insolvent liquidation within two years. 

Another option is to increase your salary to cover the loan amount. In this case, the company must be solvent and have sufficient resources to pay the salary and the PAYE and NICs due on it. If it doesn’t and the company subsequently fails, the liquidator can challenge the payment as misfeasance and you could be made to repay the company for the benefit of its creditors.

Can I move abroad to escape an overdrawn director’s loan?

If the company is insolvent and you cannot afford to repay your director’s loan, simply moving abroad is not an effective way to escape it. If you move abroad and your company is still active, the overdrawn director’s loan account will continue to accrue Corporation Tax and interest charges. Eventually, HMRC and other creditors will take steps to force the company into liquidation by issuing a Winding Up Petition against it.

In a formal liquidation procedure, the overdrawn director’s loan account will be considered a company asset. If the amount you owe is significant, the liquidator will expect you to repay the loan to the company to increase the return for the creditors. If you cannot repay what you owe, you may have to sell personal assets or consider personal insolvency proceedings, such as an IVA or bankruptcy.

If the company is forcibly wound up by the court, the liquidator will investigate the conduct of the directors. That could have severe repercussions if they find that you tried to escape your debts or were involved in other examples of director misconduct.

Voluntary Liquidation and an overdrawn director’s loan account

If you find yourself with an overdrawn director’s loan account that you cannot clear and you want to move abroad, you should take steps to tie up the loose ends before you go. You can do that by closing the company voluntarily via a procedure known as a Creditors’ Voluntary Liquidation (CVL).

Although a CVL will not clear the director’s loan, you will appoint a liquidator and work with them to consider what you can repay based on your means. Once again, the liquidator is legally obliged to investigate your conduct as a director. However, in this case, your decision to liquidate the company voluntarily and prioritise your creditors’ interests will help to reduce the risks of adverse consequences for you personally.

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Need advice?

Overdrawn director’s loans can be a tricky area, and moving abroad without paying what you owe will only muddy the waters. If you are worried about the impact of a director’s loan that you’re struggling to repay, contact our licensed insolvency practitioners for a free, same-day consultation with no obligation.

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