A loan that a director and majority stockholder provides to their own private company, due to the workings of the provision regulation, comes under Box 1 of income taxation. The interest that the private company pays is deductible from profits and progressively taxed on the director and majority stockholder. The claim decreases in value when the private company can no longer fulfill its interest and reimbursement obligations. The director and chief stockholder can offset this reduction in value against his income unless the loan is not commercially viable. This happens if the director/majority stockholder runs a default risk that an independent third party would not have accepted. The reduction in value of a non-commercial loan is a net capital loss.
Before proceeding to your limited company with a loan, you would do well to examine if a bank would be willing to provide finance at comparable conditions, in order to reduce the risk of a loan not being commercially viable. Factors that influence the commerciality of a loan can include the extent of the loan in relation to one’s own capital, duration, reimbursement obligations, the percentage of interest, subordination to other debts and securities provided. Furthermore, when guaranteeing debts of the private company, you are compelled to trade commercially.
In order to limit debate about commerciality, it is advisable to draw up a loan agreement and to use commercial interest and remuneration conditions. Do not forget to seek securities and apply, where needed, an existing loan agreement.
Established commitments must, of course, be respected. Not fulfilling the conditions with regard to interest or remuneration, will put the above in a perspective.