At this time of the year, for the self employed , matters can focus on tax and company returns.
We have created a small piece in relation to directors loans, if these are in your accounts then a read of the below may be of benefit to you.
Focus on Director’s Loans
Clients are very aware of their outstanding lending with financial institutions. In the past few years, some lenders have made keyperson protection a condition of commercial lending, so in many cases these loans are protected.
However, there may also be director’s loans outstanding that are often not considered at all when putting keyperson protection in place. Clients may not even realise that these loans could be called in if a keyperson dies or becomes seriously ill. It is perhaps more likely that this type of loan will be called in compared to a bank loan as the keyperson’s family may be in need of immediate funds to replace the earnings of the keyperson. Repayment of a loan will not generate income tax in the hands of the recipient*.
Director’s loans may be for significant amounts as many are not repaid on an ongoing basis – so the full amount remains outstanding until the keyperson/next of kin recalls the loan. Therefore a director’s loan may cause greater financial repercussions for a business if it is called in compared to a commercial loan.
The good news is that the process to put protection in place for a director’s loan is similar to that for a commercial loan. The amount of the loan needs to be identified – it should be visible in the company accounts.
If the loan is not being repaid regularly, a level term policy will be more suitable than a reducing term policy.
The business puts protection in place for the amount of the loan, on the life of the keyperson. As the business owns the policy, the business can pay the premiums with no Benefit in Kind implications for the keyperson. On the death or serious illness of the keyperson, the business claims the policy proceeds, and uses them to repay the outstanding director’s loan. The business therefore reduces their outstanding lending, and the keyperson/their family receives a payment in settlement of the loan*.
Given the above, director’s loans should form part of every conversation about keyperson protection.
Should you wish to discuss keyperson protection with one of our protection specialists, please give us a call on 045 431642 or email email@example.com
* Depending on the relationship between a keyperson and the recipient of a loan repayment, Capital Acquisitions Tax may apply