Director’s Loans in Liquidation - Repay before the balance is written off

A recent Upper Tribunal decision is an important warning for directors with overdrawn loan accounts when a company enters liquidation. An outstanding balance cannot simply be left behind on the assumption that the liquidation will extinguish it without an Income Tax consequence.

In HMRC v Gary Quillan [2026] UKUT 300 (TCC), the tribunal held that a director’s loan was “written off” for the purposes of section 415 of the Income Tax (Trading and Other Income) Act 2005 when the liquidator’s final account confirmed that no further recovery was expected. A formal release of the debt was not required.

This is the first such judgment on this point creating a binding precedent since HMRC first formally articulated that this was its view of the relevant tax legislation back in April 2016 in updates to its internal manuals. Another case Boulton v HMRC [2026] UKFTT 583 (TC) was heard in the First-tier Tribunal this year which concluded similarly, however in that case the liquidator had formally confirmed that the balance was being written-off and decisions of the First-tier Tribunal do not create a binding legal precedent.

What does this mean in practice?

Directors should not expect to satisfy an overdrawn loan merely by having the company’s debt asset distributed to them during liquidation so that debtor and creditor become the same person. Unless the balance is genuinely repaid or validly cleared before the relevant write-off, the amount left outstanding may be treated as a deemed distribution and charged to Income Tax as dividend income.

The practical message is straightforward - review any overdrawn director’s loan accounts well before liquidation and arrange repayment or obtain tailored tax and insolvency advice before the liquidator concludes that the debt has no recoverable value. Leaving the issue until the liquidation is complete may create a significant personal Income Tax liability.

Planning a liquidation? If your company has an overdrawn director’s loan account, speak to our team at enquiries@teamjs.co.uk before taking any formal steps. We can help you understand the tax implications and identify the best course of action before it is too late.