Lending to Family from Your Company: Key Tax Rules to Know

Why Consider Lending Through Your Company?

There are various scenarios where you may wish to financially support a family member—such as helping a child with a deposit for their first home. If you own a personal or family-run company with retained profits, it might seem practical to lend the money directly from the company rather than using your personal funds.

While this approach may appear tax-efficient, it comes with tax implications that are often underestimated or overlooked.

Understanding the ‘Loans to Participators’ Rule

If your business is a close company—which typically means it’s controlled by five or fewer individuals—then any loan made to shareholders (known as participators) or their associates may trigger a section 455 tax charge.

This rule applies when:

• A loan remains unpaid nine months and one day after the end of the accounting period in which it was made.

• The company is required to pay 33.75% of the outstanding loan amount as a temporary tax charge—mirroring the upper dividend tax rate.

Loans to Associates Also Trigger the Charge

The rules don’t just apply to loans made to shareholders. If a loan is extended to someone connected to a shareholder, such as a:

• Spouse or civil partner

• Child, grandchild, or other descendant

• Parent, grandparent, or ancestor

• Sibling

• Business partner of the shareholder

then section 455 tax may still apply.

Example Scenario: How the Tax Arises

Consider this example:

Louise is the sole director and shareholder of her company, L Ltd. On 1 January 2025, L Ltd lends £100,000 to Louise’s daughter Sophie to help her purchase her first home. The loan is interest-free. L Ltd’s year-end is 31 March.

If the loan is still outstanding on 1 January 2026, L Ltd must pay section 455 tax of £33,750, even though Sophie is not a shareholder. The tax is refundable only once the loan is repaid, and not before nine months and one day after the accounting year in which the repayment occurs.

Potential Benefit-in-Kind Charges

If the total loan exceeds £10,000 at any time during the tax year and is made to a family member or household member of the director, then a benefit-in-kind (BIK) arises.

This means:

• The director will be taxed on the difference between HMRC’s official interest rate and any interest actually paid (if any).

• The company must pay Class 1A National Insurance on the taxable BIK amount.

Strategic Planning Considerations

Loans from a personal company can be tax-free if:

• The amount is £10,000 or less, and

• The loan is repaid within 21 months

However, for larger or longer-term loans, the section 455 charge and BIK rules may apply. This doesn’t necessarily mean company loans are unsuitable—but the costs and implications should be carefully compared to alternatives.

For example:

• Section 455 tax is temporary and refundable when the loan is repaid.

• In contrast, interest paid on a commercial loan to a third party is a permanent cost.

• The BIK cost for loans above £10,000 should also be factored into your decision-making.

Conclusion

Lending money from your personal or family company to a relative can be a useful financial tool, but it comes with complex tax consequences. Understanding the timing, amount, and tax rules involved is crucial. When planned properly, such a loan may still be more cost-effective than using external finance—but expert advice is essential.

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