Overdrawn Director's Loan Account at Death

An overdrawn director's loan account means your husband owed the company money, not the other way round. When a director dies with the account in that state, the balance does not disappear. It is an asset on the company's books and a debt of his estate, and the company can call it in — which in practice means the other directors, the other shareholders, or a liquidator if the business does not survive him.

That is the answer people find hardest to accept, because the company often feels like a family thing rather than a separate person with claims of its own. It is not. A limited company is a distinct legal entity, and money the director drew out over and above his salary, dividends and expenses is a loan from that entity to him. Death does not release a borrower from a loan.

There is a second problem sitting behind the first, and it is the one accountants raise immediately. An overdrawn loan account left outstanding triggers a tax charge on the company itself under section 455 of the Corporation Tax Act 2010. So the company is out of pocket twice — it is short the money the director drew, and it has to pay tax on the fact. That is why the pressure on an estate to settle can be surprisingly firm even from people who came to the funeral.

Why the estate owes the company

The director's loan account is simply a running record of money passing between a director and the company outside wages and dividends. Money in from the director pushes it into credit; money out pushes it overdrawn. In a small owner-managed company it moves constantly, and most directors never look at it between one set of accounts and the next.

At death the position crystallises. If the account is in credit, the company owes the estate, and that is a different article — we cover it in what happens when the director's loan account was in credit. If it is overdrawn, the estate owes the company, the personal representatives must include the debt in the estate's liabilities, and they should not distribute anything to beneficiaries until it is dealt with.

Before you accept the figure, check for set-off. Only the net position is owed. Look for salary accrued but not paid, expenses submitted and never reimbursed, dividends properly declared but never physically paid across, and any separate loan the director made to the company. Each of those reduces the balance, and in owner-managed companies they are frequently sitting there unposted because the person who kept it all in his head has died.

Who can demand repayment depends on who is left. Where there are other directors, the board can. Where there is a single shareholder-director and no one else, there may be nobody with authority to demand anything until the shares pass and control is re-established, which creates its own paralysis — the situation set out in one director, one shareholder, one death and the deadlock that follows.

The balance is often larger than the accounts suggest

Executors reasonably start with the last set of filed accounts. That figure is almost never the right one, and the direction of travel is usually upwards.

The first reason is timing. Filed accounts show the position at a year end that may be well over a year before the death. Everything drawn since then, less anything paid in, moves the number. Ask the company's accountant for the loan account ledger up to the date of death, not the last balance sheet.

The second reason is dividends, and this is where the real damage sits in small companies. A company can only pay a dividend out of distributable profits. Where a director took regular monthly drawings and called them dividends, but the profits at the time did not support them, those dividends are unlawful. The usual accounting treatment is to reclassify them as loans to the director — which can turn a modest overdrawn balance into a substantial one at a stroke. If the family are being presented with a number far bigger than anyone expected, this is the most likely explanation, and it is worth asking directly whether it is what has happened.

Three more things commonly get posted to the loan account: personal spending on a company card, a car or other asset bought through the company and used privately, and tax the company paid on the director's behalf. And where the loan is above a threshold and no interest is charged, or interest is charged below HMRC's official rate, a taxable benefit arises for the director and a National Insurance cost for the company, both of which may be unreported and both of which HMRC can pursue.

The section 455 charge, and why the company cares so much

Section 455 of the Corporation Tax Act 2010 applies where a close company — broadly, one controlled by five or fewer participators or by its directors, which describes most family companies — lends money to a participator. If the loan is still outstanding nine months and one day after the end of the accounting period, the company must pay tax on the outstanding amount.

Three features of the charge matter to an estate.

• It falls on the company, not the director. The estate does not pay it. The company does, out of its own cash, which is precisely why the surviving shareholders want the loan cleared.
• It is refundable, but slowly. Once the loan is repaid, released or written off, the tax comes back — but the repayment is only due nine months and one day after the end of the accounting period in which that happened. A company can therefore be out of the cash for the best part of two years.
• The rate is not trivial. The charge is set by reference to the higher rate of tax on dividends, so it is a meaningful proportion of the balance rather than a nominal amount. Ask the company's accountant what the rate is for the relevant period rather than relying on a figure you have read somewhere, because it has changed more than once.

There are anti-avoidance rules to stop a company clearing a loan just before the deadline and re-lending the same money afterwards, so a temporary repayment engineered around a year end will not work. HMRC sets out the basics in its guidance on director's loans on GOV.UK, and the charging provision itself is section 455 of the Corporation Tax Act 2010 on legislation.gov.uk.

Can the company simply write it off?

Sometimes, and it is often the family's first suggestion. It is also the point at which cheap decisions become expensive ones, so take it slowly.

Where the company is solvent and the shareholders agree, the debt can be formally released. That is a decision for the company, properly minuted, and usually documented by a deed rather than a conversation. What it is not is free.

A release of a loan to a participator is generally treated as a distribution and taxed as though it were a dividend in the hands of the person released, which after a death means the tax has to be dealt with through the deceased's or the estate's tax position rather than being quietly forgotten. HMRC may additionally argue that National Insurance is due where the person was an employee as well as a shareholder, and that is contested ground. The company, meanwhile, does not normally get a corporation tax deduction for writing the loan off, so it bears the loss without relief. It does recover the section 455 tax, but only on the delayed timetable described above.

There is a further trap where the company is not on solid ground. Directors owe duties to the company, and when a company is insolvent or heading that way those duties shift towards its creditors. A release granted to a connected person can be challenged by a later liquidator as a transaction at an undervalue or as a preference, with a look-back period of two years for connected parties. A family that persuades a sympathetic board to write off a large balance can find the write-off unwound and the estate pursued anyway, eighteen months later, by someone with no sympathy at all. Do not do this without the accountant, and where the sum is material, without a solicitor.

When the company goes into liquidation

If the business does not survive the death — and in owner-managed companies it often does not — the position hardens considerably.

A liquidator has a statutory duty to collect in the company's assets for the benefit of its creditors, and an overdrawn director's loan account is the most collectable asset there is. It is a documented book debt, the amount is recorded in the company's own records, and the debtor is identified. Liquidators pursue these as a matter of routine, and the death of the director does not stop them. They pursue the personal representatives instead, because a claim that existed against a person generally survives against their estate.

Expect the liquidator to look beyond the headline balance too: at whether dividends were lawfully declared, at whether assets were transferred out of the company cheaply in the final months, and at whether payments were made to some creditors and not others. Those enquiries can produce claims against the estate that are larger than the loan account itself.

Where the estate cannot meet the claim, the company or the liquidator becomes an ordinary unsecured creditor of the estate, sharing rateably with the credit cards and everyone else. Nobody in the family becomes personally liable simply for being family — that only happens where someone was a joint borrower, or gave a guarantee. Guarantees are the exception that matters, and they are common in company borrowing, so check whether one was given: the position is in whether a personal guarantee survives the guarantor's death. If you have been appointed executor of an estate in this shape, read whether you can refuse to be executor of a debt-ridden estate before you touch anything, because renouncing is only available until you start dealing with the estate.

What the executor should actually do

In roughly this order, and preferably in the first month.

1. Get the balance in writing. Ask the company's accountant for the director's loan account ledger and the balance at the date of death, with the make-up of it. Not a figure over the telephone.
2. Interrogate the dividends. Ask whether there were board minutes and dividend vouchers, and whether distributable reserves supported each dividend when it was declared. If the answer is vague, that is significant.
3. Net off what the company owes him. Unpaid salary, unreimbursed expenses, declared but unpaid dividends, any loan he made to the company.
4. Find the paperwork. A written loan agreement may set out an interest rate, a repayment date, or terms that apply on death. Some do. Most small companies have nothing in writing at all, which is itself worth knowing.
5. Ask what insurance the company holds and who owns it. A policy owned by the company pays the company. A policy written in trust for the family pays the family. These are not interchangeable, and the difference decides whether the estate has the cash to settle.
6. Deal with the trading tail. Businesses do not stop when their owner does. Stock, platform accounts, customer money and open orders all need handling, and the practicalities are covered in a seller account with money and orders still open.
7. Do not distribute the estate. Not to beneficiaries, not to yourself, not "just the small legacies", until the loan account is settled or formally released. An executor who pays beneficiaries ahead of a creditor is personally liable for the shortfall.

One technical point to hand to a professional rather than solve yourself: the shares in the company and the loan owed to it are treated separately for inheritance tax, and the interaction between the value of the shares, any relief available on them, and the deductibility of the debt is genuinely complicated. It needs the estate's accountant, not a forum post. There is more across the wider subject in our guide to debt, credit and finance after a death.

Where cover changes the outcome, and where it does not

This is a problem insurance solves well, and it is worth understanding which policy solves which half of it, because families frequently discover they had the wrong one.

Key person cover is owned and paid for by the company and pays the company on the death of a key individual. It replaces lost profit and buys the business breathing space. What it does not do is clear the estate's debt to the company — the money lands on the company's side of the table, not the estate's. It can help indirectly, because a company sitting on cash is far more willing to consider releasing a loan account than one that is short.

Shareholder protection, written alongside a cross-option agreement, is the one that fits this situation directly. The surviving shareholders receive a lump sum on the death and use it to buy the deceased's shares from the estate. The estate then has cash rather than an unsaleable minority holding, and that cash can settle the loan account. The two problems cancel out.

Relevant life cover is a death-in-service style policy an employer arranges for an individual employee or director, written in trust so that it pays the family rather than the business. It protects the household, not the balance sheet, and it does not clear a loan account unless the family choose to use it that way.

Two honest caveats. The tax treatment of business protection depends on how each policy is owned, who pays the premiums and how the agreement is drafted, so it needs to be set up properly rather than bought off a comparison table. And whether cover is available at all, and on what terms, always depends on underwriting — health, age and occupation. Nobody can promise an insurer will offer terms. If you are a director reading this because you have looked at your own loan account and realised what it would leave behind, you can get life insurance quotes and have an FCA-authorised broker look at the business arrangements alongside the personal cover.

Scotland and Northern Ireland

Company law and corporation tax apply across the United Kingdom, so the loan account itself and the section 455 charge work identically wherever the company is registered. What differs is the machinery around the estate and around insolvency.

In Scotland, the executor obtains confirmation rather than probate, and the debt to the company must appear in the inventory of the estate. Where the estate cannot meet its debts, sequestration under the Bankruptcy (Scotland) Act 2016 is the route rather than the English insolvency administration order, and the Accountant in Bankruptcy has a supervisory role. If the director had already entered a formal debt arrangement before he died, that has its own consequences, set out in what happens to a Scottish trust deed when the debtor dies. Corporate insolvency in Scotland runs through the Court of Session or the sheriff court, with Scottish procedures and Scottish insolvency practitioners.

In Northern Ireland, grants are issued through the Northern Ireland Courts and Tribunals Service, and insolvency operates under Northern Ireland's own legislation rather than the Insolvency Act 1986. The substance of a liquidator's pursuit of an overdrawn loan account is much the same, but the court, the forms and the statutory references are different, so use a local insolvency practitioner and a local solicitor.

Frequently asked questions

Does the estate have to repay an overdrawn director's loan account?

Yes, if the company calls it in. An overdrawn account means the director owed the company money, so the balance is an asset of the company and a debt of the estate. A liquidator will pursue it, and so may the company's other directors or shareholders. Check first for salary, expenses or declared dividends owed the other way, because only the net balance is due.

Can the company write the loan off after the director dies?

A solvent company's shareholders can agree to release the balance, but it is not consequence-free: a release is generally treated as a distribution and taxed accordingly, the company does not normally get a corporation tax deduction, and it cannot safely be done where the company is insolvent or heading that way, because a later liquidator can challenge it. Take professional advice first.

What is the section 455 tax charge?

Where a close company lends money to a participator and the loan is still outstanding nine months and one day after the end of the accounting period, HMRC charges the company tax on the outstanding balance. It is refunded once the loan is repaid or released, but only nine months and one day after the end of the accounting period in which that happens, so the cash goes out long before it comes back.