It’s not uncommon for parents to help their children with a house deposit or other big life step—and if you run your own limited company, it might seem logical to use your business profits to fund that family loan.
But before your company writes the cheque, it’s important to understand the tax consequences that come with it. Loans from personal or family companies—especially to relatives—can trigger some tricky charges if you’re not careful.
Let’s take a closer look.
The Section 455 Tax Charge: What Is It?
Most small business owners operate through what’s known as a close company—essentially a limited company controlled by five or fewer people.
If your close company makes a loan to a “participator” (typically a shareholder or someone connected to them), it could trigger a Section 455 tax charge. This applies if the loan hasn’t been repaid within 9 months and 1 day of the end of your company’s accounting period.
The charge is 33.75% of the outstanding loan—matching the higher dividend tax rate. That’s a hefty hit on your company’s cash flow.
Loans to Associates Count Too
Here’s where many business owners get caught out…
Even if the loan isn’t made directly to you as the shareholder or director, it still counts if it goes to an associate—and that includes:
- Your spouse or civil partner
- Parents or grandparents
- Children or grandchildren
- Siblings
- Or even your partner
So if your company lends money to your daughter, brother, or anyone else in your household, it’s still within HMRC’s net.
Example: Trisha and Macey
Let’s say Trisha is the sole director and shareholder of T Ltd.
On 1 January 2025, T Ltd lends £100,000 to Trisha’s daughter, Macey, to help her buy her first home. It’s an interest-free loan, and the company’s year-end is 31 March.
If the loan is still unpaid by 1 January 2026, T Ltd will need to pay £33,750 in Section 455 tax—even though Macey isn’t directly involved in the company.
Yes, this tax is repayable once the loan is settled—but in the meantime, it’s a significant amount of money tied up unnecessarily.
Benefit in Kind: Another Potential Pitfall
If the loan is over £10,000 at any point in the tax year, it may also trigger a benefit in kind (BIK) charge.
This is because the loan is classed as a benefit to someone connected to a company director. The BIK is calculated based on the difference between the official HMRC interest rate and what the borrower is actually paying (which is often nothing).
In addition to the tax on the BIK, your company would also be liable for Class 1A National Insurance on the taxable benefit.
Planning Tips: Is It Worth It?
It’s not all doom and gloom—loans of £10,000 or less, repaid within 21 months, can avoid most of these tax traps.
But if you’re thinking about a larger or longer-term loan, here’s what to consider:
- Section 455 tax is temporary, but it can impact cash flow significantly.
- Compare this with the interest your family member would pay on a third-party loan—that interest is gone forever.
- Weigh up the benefit in kind and NI costs versus the savings for your relative.
- Make sure you’ve got a clear repayment plan—especially if the aim is to eventually recover the Section 455 tax.
Need Help Planning a Loan from Your Company?
Making a loan to help your child buy their first home—or to support another family member—is a generous gesture. But doing it through your company needs careful planning to avoid unexpected tax bills.
Not sure where you stand or what’s best for your situation? Get in touch with Jon or the team today for tailored advice that makes sense for your family and your business.
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Any questions?
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