The tax implications of writing off a loan

January 31st 2024

The Managing Director of a company, who is also the main shareholder, has given loans of £25,000 to the company to support it through the economic downturn. The company’s losses for the latest year end are £30,000. As the director’s loan is currently showing as a liability, the director is considering writing it off to strengthen the balance sheet. But what are the tax implications of doing so?  Kenny Logan from our Edinburgh office looks at this question below.

Writing off the loan
If the director shareholder is happy to simply write off the loan then he will need to show this write-off as income in the profit and loss account and the company’s losses will be reduced by the amount of the write-off. As these losses could have been carried forward and offset against future profits which would have been taxed at up to 25%, writing off the loan is not a tax-efficient option for the company. If the director shareholder has capital gains in a particular tax year, they could offset the loan write-off against these and get an income tax deduction for the loan write-off of up to 28% if the gains relate to residential property.

Converting loan to equity
A more tax-efficient option would be to convert the loan to equity. If the director shareholder is willing to convert such debt into equity shares, the debt is removed from the balance sheet without creating a tax charge for the company. From the director shareholder’s point of view, the money can still potentially be repaid at a future point when funds permit, e.g. through a share buyback.

If a director writes off their loan to the company to strengthen the balance sheet, this is classed as taxable income for the company although the director could personally benefit as it will generate a capital loss. A more tax-efficient option is usually to convert the loan to equity shares as there is no taxable income for the company.

Contact the JRW Hogg & Thorburn tax department for tax and company loan related questions.