Section 455: The Tax Charge on a Director's Loan From a Property Company

Property SPVs sit on cash between projects more than most companies, and it is tempting to treat that balance as a personal reserve — a deposit for the next purchase, a bridge until a sale completes, a way to smooth a lean year. Borrowed informally and left outstanding, that reserve triggers one of the more misunderstood charges in the Corporation Tax system: Section 455. It is not a penalty in the usual sense, and it is refundable, but the cash cost is real and the timing rarely suits the person who has just discovered it applies.

What actually counts as a loan

Section 455 applies to close companies — broadly, companies controlled by five or fewer participators, which covers almost every owner-managed property SPV — lending to a "participator", typically a director-shareholder, or to someone connected to them. It is not limited to a formal loan agreement. Drawing money from the company account for personal use, running a personal expense through the company, or simply not clearing a director's current account into credit by the year end can all create a loan balance for these purposes, whether or not anyone called it a loan at the time.

The charge itself

If a loan to a participator is still outstanding nine months and one day after the end of the accounting period in which it was made, the company pays a Corporation Tax charge on the outstanding balance, reported on the CT600A supplementary return alongside the main Corporation Tax computation. The rate is currently 33.75%, deliberately set close to the higher rate of tax on dividends — the logic being that a loan left outstanding indefinitely functions as a way of extracting company profit without ever formally declaring a distribution, so the charge removes that advantage.

This is a charge on the company, not the director personally, and it sits alongside (not instead of) the separate benefit-in-kind rules covered below. It is due on the normal Corporation Tax payment date, which for most owner-managed companies is nine months and one day after the year end — the same date the loan needs to be cleared by to avoid the charge in the first place.

Getting it back: the refund mechanism

Section 455 is not a permanent cost if the loan is genuinely repaid. Once the balance is cleared — repaid, written off, or released — the company can reclaim the tax it paid under a Section 458 claim. The catch is timing: the refund is not due until nine months after the end of the accounting period in which the repayment happens, not the period the tax was originally paid in. If a loan made in year one is repaid partway through year three, the refund does not land until roughly nine months after year three closes — meaning the cash can sit with HMRC for two or three years even on a straightforward, genuine loan that is eventually cleared in full. For a company relying on its cash reserves between developments, that gap needs planning for, not discovering after the fact.

The bed-and-breakfasting rule

The obvious workaround — repay the loan just before the nine-month deadline to avoid the charge, then redraw a similar amount shortly afterwards — is specifically blocked. HMRC's anti-avoidance rules, introduced in 2013, disregard a repayment for Section 455 purposes in two situations: where more than £5,000 of new borrowing is redrawn within 30 days of the repayment, and separately, with no time limit at all, where the repayment and a new loan of £15,000 or more were arranged as part of the same overall plan from the outset. In either case, the repayment is treated as never having happened for Section 455 purposes, and the charge applies as if the original loan simply continued. Genuinely repaying a loan from independent funds — a dividend declared and paid, salary, or external funds — and only later taking out a fresh, separately decided loan is unaffected; it is the choreographed repay-and-redraw pattern the rule targets.

The benefit-in-kind sitting alongside it

Separately from Section 455, a loan over £10,000 at any point in the tax year that is interest-free, or charged at less than HMRC's official rate, is treated as a taxable benefit in kind on the director. It is reported on the annual P11D, taxed on the director through their Self Assessment return, and triggers Class 1A National Insurance for the company. Charging interest at or above the official rate removes this exposure, though the interest itself is then taxable income for the company and the director needs to actually pay it, not simply have it added to the loan balance, for the benefit-in-kind charge to be avoided.

Write-off instead of repayment

Sometimes a director's loan is written off rather than repaid — formally waived by the company, often where cash genuinely is not available. This changes the tax treatment considerably. For the director, a written-off loan is generally treated as a dividend (or, if the director also holds an employment with the company, potentially as employment income subject to PAYE and National Insurance, depending on the facts) rather than simply disappearing tax-free. For the company, the Section 455 tax already paid can still be reclaimed once the write-off takes effect, following the same delayed timing as a cash repayment, but the write-off itself is not normally a deductible expense for Corporation Tax. Treating a persistent overdrawn loan account as a problem to write off later, rather than a balance to actively manage, usually produces a worse outcome than simply declaring a dividend to clear it in the first place.

Why property SPVs are particularly exposed

The pattern that catches property companies specifically is using the SPV as an informal cash reserve between projects — drawing funds for a personal deposit, a renovation on the director's own home, or simply day-to-day living costs, on the basis that a dividend will be declared "at some point" to clear it. Because development and investment cash flow is naturally lumpy, it is easy for a loan account to build up gradually across a financial year without anyone treating it as a formal loan, only to discover at the accounts stage that a significant Section 455 charge is now due because the balance was never cleared in time. The fix is straightforward in principle — treat any drawdown as a loan from the point it happens, keep a running balance, and either charge interest at the official rate or plan a dividend or bonus to clear it well before the nine-month deadline, not on the deadline itself.

This sits alongside the wider set of extraction routes — salary, dividends, pension contributions, and eventually a Members' Voluntary Liquidation — that we cover in full in our guide to extracting profit from a property company. A directors' loan can be a legitimate short-term cashflow tool used deliberately and repaid on schedule; the trouble comes from treating it as free money rather than a facility with real costs attached.

Common questions

What is the Section 455 tax charge?

Section 455 is a Corporation Tax charge on a close company when a director or shareholder (a participator) borrows money from the company and the loan is still outstanding nine months and one day after the end of the accounting period. The charge is currently 33.75% of the outstanding balance, broadly matching the higher rate of tax on dividends.

Can you get the Section 455 tax back?

Yes. Once the loan is repaid, written off or released, the company can reclaim the Section 455 tax paid on it — but the refund is not due until nine months after the end of the accounting period in which the repayment happens, which can be well over a year after the tax was originally paid. The cash cost is real even though the charge is ultimately temporary.

What is bed-and-breakfasting a director's loan?

Bed-and-breakfasting is repaying a director's loan just before the nine-month deadline to avoid the Section 455 charge, then redrawing a similar amount shortly afterwards. HMRC's anti-avoidance rules disregard a repayment for Section 455 purposes if more than £5,000 is redrawn within 30 days, or if repayment and redrawing were arranged in advance as part of the same overall plan, regardless of the gap.

Is a director's loan from a company the same as a dividend?

No, and that is exactly why Section 455 exists. A loan is not taxed as income when it is drawn, unlike a dividend, so without a deterrent a director could effectively access company profits tax-free by calling it a loan rather than a distribution. Section 455 removes that advantage by taxing the company on any loan left outstanding for too long, while a genuine loan that is properly repaid is not taxed as income on the director at all.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

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