When is a loan to a Director a benefit in kind and subject to a tax charge?

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Loans to directors and employees are frequently used by companies as part of their staff remuneration packages. Common examples include loans to buy shares, season ticket loans and loans to pay income tax or NICs on the exercise of share options.

A benefit in kind tax charge will arise on a loan that meets each of the following conditions:

  • the loan is an ’employment related loan’
  • it is interest free or the interest rate is below the official interest rate
  • the loan does not fall within any of the prescribed exceptions, the most notable of which is the £10,000 de minimis exception.

On 8 March 2017 regulations were made to reduce the official rate of interest on employment related loans from 3 per cent to 2.5 per cent with effect from 6 April 2017. Therefore if you do not want your directors to face a tax charge, the company should charge interest at a rate greater than 2.5 per cent.

WM comment

We will provide another update if the interest rate changes again in the future.