An interest free loan with a fixed repayment date is a financing transaction under FRS 102, so it is normally recorded at its present value rather than its face value. A small company can record a loan from a director who is a shareholder, or from that director’s close family, at the amount lent. There is no equivalent concession for loans made by the company to a director.

Why would a director’s loan be discounted at all?

Paragraph 11.13 of FRS 102 normally measures a loan at the transaction price. The exception is an arrangement that is in effect a financing transaction, meaning payment is deferred beyond normal business terms or financed at a rate of interest that is not a market rate. That loan is measured at the present value of the future payments, discounted at a market rate of interest for a similar debt instrument. ICAEW guidance names loans between an entity and its directors as one of the most common examples.

The result is that a fixed term interest free loan is recorded below its face value. The shortfall is then unwound as a notional interest charge over the term, so that the liability reaches the full amount by the repayment date. The general rules are on the page on loans at below market interest rates; this page covers what is different for directors.

What is the small entity concession?

Paragraph 11.13A(a) allows a small entity to measure initially at transaction price a basic financial liability that is a loan from a person within a director’s group of close family members, where that group contains at least one shareholder in the entity. A footnote defines the group as the director and the close members of that director’s family, and confirms it includes a sole director shareholder. The glossary defines close members of the family as those who may be expected to influence, or be influenced by, the person in their dealings with the entity, including children, a spouse or domestic partner, children of the spouse or partner, and dependants.

So the concession covers, for example, a loan to a small company from its director shareholder, from that director’s spouse, or from a director who holds no shares when the director’s spouse does. Under paragraph 11.14(a)(i) the effective interest rate is then the rate implicit in the contract, which may be zero, so an interest free loan simply sits at the amount owed.

Two transition points are set out in the standard. Paragraph 11.13B allows a company that stops being small to remeasure the loan to present value prospectively from its first reporting date as a larger company, using facts at that date or at the date of the loan. Paragraph 11.13C requires a company that becomes eligible and chooses the concession to apply it retrospectively.

The concession has its origin in 2017, when the FRC issued interim relief for small entities while it consulted on a permanent change, after many small companies faced discounting directors’ loans in their first FRS 102 accounts.

Which loans does the concession not cover?

  • Loans from the company to a director. Paragraph 11.13A(a) applies only to a financial liability, so an amount owed by a director is never covered.
  • Medium and large companies. The concession is for small entities only.
  • Lenders outside the family group. A loan from a director with no shareholding, where no close family member holds shares either, is outside it.
  • Intra group loans. ICAEW confirms the exemption does not apply to these.
  • Loans that are not basic. The concession refers to a basic financial liability, so a loan with profit linked interest, for example, is outside it.

How is a loan from a director measured without the concession?

ICAEW explains that FRS 102 does not say where the difference between face value and present value goes, so a policy is chosen under paragraph 10.4 based on why the loan was made at a non market rate. Where a director lends in the capacity of shareholder, the difference is treated as a capital contribution credited to equity. ICAEW says this can generally be presumed where the director is the majority shareholder, though the presumption can be rebutted if, for example, employees get loans on the same terms.

Illustration only. A medium sized company’s majority shareholder director lends it £100,000 interest free, repayable in five years. A similar loan would carry interest at 6%. The present value is £74,726. The company records the loan at £74,726 and credits £25,274 to equity as a capital contribution. In year one it charges notional interest of £4,484, taking the liability to £79,209, and the charge rises each year until the liability reaches £100,000 on repayment. Had the company been small, it could have recorded the loan at £100,000 with no interest.

How are loans from the company to a director measured?

A loan that the director must repay on demand is not a financing transaction. ICAEW explains, in the context of intercompany loans, that a loan repayable on demand is recognised at the undiscounted amount. Most overdrawn directors’ loan accounts are informal balances of this kind. ACCA guidance notes that where there are no written or verbal terms, as with a long outstanding director’s loan, the treatment needs judgement after discussion with the director.

A fixed term interest free loan to a director is discounted. Following ICAEW, if the director borrows as a shareholder, the difference is accounted for as a distribution. If the director is not acting as a shareholder, for example a loan to buy a season ticket, the difference is an employee benefit under Section 28.

Illustration only. A small company lends its majority shareholder director £50,000 interest free, repayable in three years, where a market rate would be 5%. The company records a receivable of £43,192 and debits £6,808 to equity as a distribution. It then recognises notional interest income of £2,160 in year one, £2,268 in year two and £2,381 in year three, when the full £50,000 is due.

Making the loan may also need shareholder approval under the Companies Act; see loans to directors and member approval.

What about micro entities?

A micro entity using FRS 105 does not discount these loans. ICAEW’s comparison of the two standards notes that FRS 105 recognises financial instruments at transaction price and has no requirement to impute a market rate of interest on arrangements at non market rates. See FRS 105 micro entity accounts.

What must the accounts disclose?

For advances and credits to directors, a small company must give, under paragraph 1AC.36 and section 413 of the Companies Act 2006, the amount, an indication of the interest rate, the main conditions, and any amounts repaid, written off or waived, with totals. Loans from directors are related party transactions, and paragraph 1AC.35 requires related party disclosures under paragraphs 33.9 and 33.14.

What are the tax consequences?

For corporation tax, loan relationship debits and credits are based on amounts recognised as items of profit or loss (section 308 CTA 2009), so a capital contribution credited to equity is not taxed. Section 446A then deals with the notional interest. Where a company first recognised a debt at less than the transaction price and the discount was not brought into account as a credit, the debits relating to that discount are not deductible. Where the lender is a company, this applies only if the lender is in a non qualifying territory, so for a loan from an individual director the notional interest is generally not deductible.

Loans to directors raise separate tax points. A loan to a participator in a close company can trigger a charge under section 455, explained in the directors’ loan account guide. An interest free or cheap loan to a director can also be a taxable beneficial loan. HMRC treats loans with a combined outstanding value under £10,000 throughout the tax year as exempt; see benefits in kind and P11D.

What are the common mistakes?

  • Applying the small entity concession to a balance the director owes the company.
  • Discounting a loan that is repayable on demand.
  • Taking the notional interest on a director’s loan as a tax deduction despite section 446A.
  • Continuing to use the concession after the company stops being small, instead of remeasuring under paragraph 11.13B.
  • Omitting the section 413 note because the loan was repaid by the year end; amounts repaid during the year still have to be shown.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.