Something that slipped under the radar slightly during the 2024 Autumn Budget was a change to the rules concerning director’s loans and anti-avoidance. This came into effect immediately and draft legislation has already been published. Here are the key updates:
Targeted anti-avoidance rule (TAAR) update
Effective from 30 October 2024, the government has updated the Targeted Anti-Avoidance Rule (TAAR) for loans to participators (also known as director’s loans). This change was created to close a loophole that some companies were exploiting by moving loans between a group of companies, or associated companies, to avoid the Section 455 tax charge. The points to note concerning the new rules are:
- This change applies where groups of companies or associated companies use chains of loans to avoid the Section 455 tax charge;
- TAAR will now apply if any company or shareholder tries to avoid paying Section 455 tax;
- If TAAR is applied, no tax relief for return payments will be available.
No changes to Section 455 tax charges
The fundamental aspects of Section 455 tax will continue unchanged as follows:
- Tax payable on an overdrawn director’s loan account will be payable at 33.75% (or 32.5% for outstanding loans made before 6 April 2022);
- Tax is only payable if the loan is not repaid within nine months and one day of the end of the company’s accounting period.
What are the implications of this change for directors?
These changes primarily affect directors and companies that were using complex loan arrangements to avoid tax. For most directors with straightforward loan accounts, the rules remain largely the same.
However, it’s now more important than ever to ensure that any director’s loan arrangements you have in place do comply with the updated regulations to avoid unexpected tax charges. This is especially significant if they involve multiple companies or complex structures.
We recommend speaking with your tax advisor to ensure that the loan arrangements you have in place comply with the new director’s loan rules.