Director & Shareholder Loan Agreement UK Guide
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When a director or shareholder puts their own money into the company, a handshake is not enough. A written loan agreement records what the money is for, when it comes back, and what happens if things go sideways. I'm Brad Askew, and in my experience running businesses and advising founders, this is one of the documents people skip until HMRC, an auditor, or a falling out forces the issue.
Whether you are bridging a cashflow gap, funding a new project, or formalising money you have already paid in, a clear agreement protects both the person lending and the company receiving the funds. This guide walks through when these loans are used, what the agreement should cover, and the legal and tax points worth thinking about before you sign.
What this document is
A director or shareholder loan agreement is a written contract between an individual (the lender) and the company they are connected to (the borrower). It sets out the amount lent, whether interest is payable, how and when the money will be repaid, and what rights the lender has if the company does not pay.
Unlike a bank loan, these arrangements tend to be more flexible on commercial terms, but they still need to be properly documented to stand up to scrutiny from HMRC, auditors, lenders, or a future buyer of the business. The agreement can be unsecured, where the lender relies on the company's general ability to repay, or secured against company assets through a separate document such as a debenture.
Directors also need to be mindful of their duties under the Companies Act 2006, particularly around conflicts of interest and transactions between the company and its own officers. Getting the paperwork right from the start avoids awkward questions later about whether money was a loan, a capital contribution, or something else entirely.
How to use this document
- Decide whether the money is genuinely a loan. Before drafting anything, be clear about the commercial intention. A loan is expected to be repaid; capital injected as equity is not. The tax and accounting treatment is very different, so the agreement should match what the parties actually intend, and the bookkeeping should follow suit from day one.
- Agree the core terms in plain English. Settle the loan amount, the interest rate (if any), the repayment schedule, and the term before you draft. Think about whether repayments are on demand, fixed monthly, or a single bullet payment at the end. Also consider whether the lender can call the loan in early and on what notice.
- Deal with security and ranking. If the loan is secured, a separate security document such as a debenture will usually be needed, and it may need registering at Companies House within the statutory deadline. If the company already has a bank facility, check whether the bank's terms restrict taking on new debt or require a deed of priority.
- Comply with company law formalities. Directors have duties under the Companies Act 2006 to declare any interest in a proposed transaction with the company. Depending on the articles, a board resolution or shareholder approval may be needed. Keep minutes, record the decision, and make sure the agreement is properly signed by authorised people on both sides.
- Record it in the accounts and think about tax. The loan should appear correctly in the company's books and the director's loan account. HMRC treats loans between directors and their companies carefully, particularly where interest is below market rate or the loan sits on the books for a long period. Speak to the company's accountant so the treatment is right from the outset.
If you're dealing with this kind of situation, speak to an experienced legal adviser who can walk you through it — from £89.
Common questions
Q Does a director loan to their own company need to be in writing?
There is no strict legal rule that says it must be, but in practice you should always put it in writing. Auditors, HMRC, and any future investor or buyer will expect to see documentation. Without a written agreement, it can be difficult to prove the terms, the interest position, or even that the payment was a loan at all rather than salary, dividend, or capital.
Q Can the loan be interest-free?
Yes, a company can borrow from a director or shareholder on an interest-free basis, and many informal loans are structured this way. However, there can be tax consequences for both sides depending on the circumstances, and the agreement should still clearly state that no interest applies. If interest is charged, the lender will usually need to declare it as income.
Q Do shareholders need to approve the loan?
It depends on the company's articles of association and the size and nature of the loan. The Companies Act 2006 contains specific rules on loans to directors (rather than from them), but any transaction between a director and the company still requires proper declaration of interest. Check the articles, take minutes, and if in doubt, pass a shareholder resolution to keep the position clean.
Q What happens if the company cannot repay the loan?
If the company runs into financial difficulty, an unsecured director loan usually ranks alongside other unsecured creditors, which can mean little or nothing is recovered. If the loan is secured by a registered debenture, the lender's position is stronger. Directors considering lending to a company that is already struggling should take advice, as wrongful trading and preference rules can come into play.
Q How is a director or shareholder loan treated for tax?
The tax treatment depends on the direction of the loan, the interest rate, and how long the balance sits on the books. Loans from a director to the company are generally straightforward, but interest received is taxable income. Broader rules apply where the company lends to the director. The company's accountant should always sign off the treatment before the loan is made.
Q Can the loan be repaid early?
Only if the agreement allows it, or if both parties agree at the time. Some agreements allow early repayment without penalty, others require notice, and a few prohibit it altogether so that the lender gets a predictable return. This should be spelled out in the repayment clause rather than left to assumption.
Q Should the loan be secured or unsecured?
Both are common. Unsecured is quicker and cheaper, and is often used for smaller, shorter-term loans between trusted parties. Secured loans, usually backed by a debenture over company assets, give the lender much stronger protection if things go wrong but add cost, registration requirements at Companies House, and potential complications with existing lenders.
If you're dealing with this kind of situation, speak to an experienced legal adviser who can walk you through it — from £89.
Sources
This guide is based on primary UK law and official guidance.
- LegislationCompanies Act 2006legislation.gov.uk
- Guidance · UK GovCompanies House: register a charge (MR01)gov.uk
- Guidance · UK GovHMRC: director's loan accountsgov.uk
- Guidance · Companies HouseCompanies House filing requirementsgov.uk
Legal helpline
Lending money to your own company?
Director and shareholder loans sit at the crossroads of company law, tax, and personal risk, and small drafting choices can have big consequences later. An experienced legal adviser can help you think through the structure, terms, and formalities based on what you describe on the call.
- Plain-English answers to your specific questions about the loan
- Practical perspective on interest, security, and repayment based on what you describe
- What to watch out for around director duties and company approvals in your circumstances
- Clarity on your next steps before you sign or transfer funds
Legal disclaimer
This article is for general information only. It is a tool to help you find your way — not legal advice, and not a substitute for speaking to a qualified adviser about your situation.