A director's loan account US tax problem arises when an American owner borrows from their own UK limited company. The UK treats an overdrawn director's loan as a loan, with a temporary 35.75% company charge if it is not repaid in time. The US can treat the same balance as an investment in US property under Internal Revenue Code section 956, taxing the owner on it as ordinary income even though no dividend was paid.
Taking money out of a company as a loan is routine for UK owner-managers. It is flexible, and repaying within nine months of the year-end avoids any UK charge. For a US citizen, that habit is far riskier. The US rules for controlled foreign corporations were written to stop exactly this kind of tax-free access to offshore profits. This guide explains both systems and how to keep a director's loan account from creating US income. It covers loans from the company to the owner first, then loans the other way.
How the UK taxes a director's loan account
A director's loan account (DLA) records money moving between a director and the company outside salary, dividends and expenses. If you take out more than you have put in, the account is overdrawn and you owe the company. GOV.UK explains the rules on its director's loans page.
The section 455 charge
If a loan to a participator is still outstanding nine months and one day after the company's year-end, the company pays a charge under section 455 of the Corporation Tax Act 2010. The rate is 35.75% for loans made on or after 6 April 2026, up from 33.75% for earlier loans (HMRC, 2026/27). The charge is not permanent. HMRC repays it after the loan is repaid, released or written off, but only nine months after the end of the accounting period in which that happens.
The benefit in kind
If the balance exceeds £10,000 at any point in the tax year and you pay interest below the official rate, you have a taxable benefit. The official rate of interest is 3.75% for 2026/27 (HMRC). The company reports the benefit on form P11D and pays Class 1A National Insurance on it.
Anti-avoidance on repayments
Repaying just before the deadline and borrowing again shortly afterwards does not work. If you repay £5,000 or more and borrow again within 30 days, the repayment is matched to the new loan. A further rule applies to balances of £15,000 or more where you intended to redraw.
Director's loan account US tax rules
The US analysis starts from a different place. A UK company owned by a US citizen is usually a controlled foreign corporation (CFC). The US does not allow a US shareholder to enjoy a CFC's earnings without tax simply by calling the payment a loan.
Section 956: investment in US property
Under Internal Revenue Code section 956, an obligation of a US person held by a CFC is "United States property". A loan from your UK company to you, a US person, falls within that definition. As a result, you can be required to include an amount in your US income, based on the average quarterly balance and limited by the company's earnings. The inclusion is ordinary income. It is not a qualified dividend, so the lower dividend rates do not apply.
The short-term exception
IRS guidance excludes certain short-term obligations. Broadly, a loan collected within 30 days is ignored, provided the CFC does not hold such obligations for 60 days or more in total during its year. That is far tighter than the UK's nine-month window. Therefore, a loan that is perfectly safe for UK purposes can still fall within section 956.
Why individuals are worse off than companies
Regulations issued in 2019 largely removed section 956 inclusions for US corporate shareholders. Individuals did not receive that relief. Consequently, an American who owns a UK company personally remains fully exposed, unless a section 962 election changes the result. Our guide to the section 962 election explains when that helps.
Constructive dividends and imputed interest
Two further US rules can apply. First, if the "loan" has no written terms, no interest and no realistic repayment plan, the IRS can treat it as a constructive dividend from the outset. Second, an interest-free or low-interest loan can trigger imputed interest under section 7872. Proper loan documentation and a commercial interest rate reduce both risks.
| Event | UK treatment | US treatment for an individual owner |
|---|---|---|
| Loan repaid within 30 days | No charge | Generally ignored under the short-term exception |
| Loan repaid within 9 months of year-end | No section 455 charge | Possible section 956 inclusion |
| Loan outstanding beyond 9 months | Company pays 35.75%, refundable later | Possible section 956 inclusion; company charge not creditable to you |
| Balance over £10,000, no interest | Benefit in kind at 3.75% official rate | Possible imputed interest under section 7872 |
| Loan written off | Taxed on you as dividend income | Taxable distribution or income |
The foreign tax credit gap
The section 455 charge is paid by the company, not by you, and it is refundable. It therefore gives you no US foreign tax credit. If section 956 creates US income in a year when you paid little UK personal tax on the loan, US tax can be due with nothing to offset it. In contrast, a salary or dividend carries UK personal tax that can be credited. Our foreign tax credit and double taxation page explains which UK taxes qualify.
When the company owes you
The opposite position is much simpler. If you lend money to your company, or leave undrawn salary or dividends in it, your loan account is in credit. Drawing that balance down is a repayment of your own money. It is not income in either country. If the company pays you interest, the interest is taxable in both, and the company must normally deduct UK basic-rate tax from it and report it to HMRC.
Director's loan account US tax reporting on Form 5471
Loans between you and the company are reported on Form 5471, including Schedule M for transactions between a CFC and its shareholders. The IRS explains the schedules in its Form 5471 guidance. An unexplained shareholder loan on Schedule M is an obvious audit question. Our guide to Form 5471 categories of filers shows which schedules you must complete.
Avoiding a director's loan account US tax charge
First, prefer salary or a properly declared dividend to a loan. Second, if you must borrow, keep the loan short, documented and at a commercial interest rate. Third, clear any balance by declaring a dividend or bonus before it runs across quarter-ends. Finally, review the position before the company's year-end, not after. Our guide to salary versus dividends for a US citizen compares the two main routes.
An illustrative case
Consider an illustrative American consultant in Reading who owns all of a profitable UK Ltd. The facts are illustrative. In June 2026, she borrows £40,000 from the company for a house deposit and repays it in May 2027 from a dividend. For UK purposes, she repaid within nine months of her December 2026 year-end, so no section 455 charge arises, though a benefit in kind is reported. For US purposes, the loan was outstanding across several quarter-ends in 2026. Section 956 can treat part of it as her ordinary income for 2026, a year in which no dividend had yet been paid.
If you have an overdrawn director's loan account, or plan to borrow from your company, book a consultation with our US-UK business tax team. We check the director's loan account US tax position before your year-end.
Frequently Asked Questions
Is a director's loan from my UK company taxable in the US?
It can be. A UK company owned by a US citizen is usually a controlled foreign corporation, and a loan from it to a US shareholder is United States property under Internal Revenue Code section 956. The shareholder may have to include an amount in US income as ordinary income, even though no dividend was paid.
What is the section 455 charge on a director's loan?
Section 455 of the Corporation Tax Act 2010 charges a UK company 35.75% of a loan to a participator made on or after 6 April 2026 if it is still outstanding nine months and one day after the year-end. HMRC repays the charge after the loan is repaid or written off.
Can I claim a US foreign tax credit for the section 455 charge?
No. The section 455 charge is paid by the company, not by the individual, and it is refundable when the loan is repaid. It does not give an individual shareholder a US foreign tax credit.
How quickly must a director's loan be repaid to avoid US tax?
IRS guidance generally ignores an obligation collected within 30 days, provided the company does not hold such obligations for 60 days or more in total during its year. That is much shorter than the UK's nine-month repayment window.
Is repaying my own loan to the company taxable?
No. If your director's loan account is in credit because you lent money to the company, drawing it down is a repayment of capital and is not income in the UK or the US. Any interest the company pays you is taxable in both countries.
Where is a director's loan reported on a US return?
Loans between a controlled foreign corporation and its US shareholder are reported on Form 5471, including Schedule M. Any section 956 inclusion is reported on the shareholder's Form 1040.
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