Many advisory articles touch upon overdrawn Directors’ Loan Accounts during insolvency proceedings, however many of them aren’t telling the whole story. These articles tend to deal with how these types of situations are treated by Insolvency Practitioners, with the overriding point being stressed that the practitioner in question will seek a commercial settlement in line with the directors assets and liabilities position, which may be for less than the actual amount owed.

There may be more to settle than just a settlement

In instances where the Directors’ Loan Account is written off, in full, or part, they will be significantly attractive to any director who is facing the loss of his/her business, however there are potential consequences that must be considered. The problem arises when the balance is not paid in full resulting in a “write off” of the balance due. Whilst the practitioner will not formally write the loan balance off in any accounts, the director has a duty to advise HMRC (via his accountant) of the “benefit” obtained in not making repayment in full. This can result in the loan account balance being charged as income and an income tax liability being generated against the director personally. Depending upon the director’s earnings this tax charge can be as much as 40%-45% of the write off amount and result in a significant personal tax liability which the director will have to find, or risk being pursued (potentially to bankruptcy) by HMRC. Although most directors will be advised by their accountants, we believe it is imperative that potential matters like this are addressed as early as possible so that a decision can be made based upon an understanding of the entire picture and a thorough understanding of insolvency proceedings.

Expert advice from The Insolvency Experts

For more advice around overdrawn Directors’ Loan Accounts, please get in touch with The Insolvency Experts today. Contact us online or call us on 0300 303 8284 to speak to one of our experienced Insolvency Practitioners directly.