I advise Ltd company director-shareholders most weeks on the salary, dividend and loan-account mix, and there is one question I get every time a company starts heading toward liquidation. Some version of: "what happens to my overdrawn director's loan when the company is gone?" Most directors believe the answer is "nothing" - the company dies, the loan dies with it, you walk away. A First-tier Tribunal decision handed down on 6 May 2026 says otherwise, and it spells out the mechanism with uncomfortable precision.
TL;DR: When a liquidator settles an overdrawn director's loan for less than the balance, the written-off part is taxable income on the director under s.415 ITTOIA 2005, taxed at dividend rates. Liquidation does not erase it. In Boulton, that meant tax on £91,802 plus a careless-conduct penalty. Settle in full if you can, and disclose either way.
What actually happened to Mr Boulton?
His company's accounts to 28 February 2013 recorded a director's loan account of £151,802. The company entered creditors' voluntary liquidation on 12 June 2014. Six years later, on 10 March 2020, he settled with the liquidator for £60,000 in full and final, leaving £91,802 unpaid (Boulton v HMRC TC09846, 2026).
The liquidator wrote to him on 27 April 2020 saying the remaining balance was "effectively written off" and that he should declare it on his tax return. He filed his 2019-20 return on 1 April 2021 and left the amount off, with no note attached. HMRC opened a discovery assessment on 2 February 2023, charged income tax on the £91,802, and later added a penalty. The tribunal dismissed his appeal on every point.
Why does a written-off director's loan get taxed at all?
Because a release of a loan to a participator is treated as income in the borrower's hands. When a close company writes off or releases a loan to a participator, s.415 ITTOIA 2005 treats the released amount as a distribution, taxed on the individual at dividend rates (HMRC SAIM5200, 2026). For 2025-26 that means 8.75%, 33.75% or 39.35% depending on the band, after the £500 dividend allowance (GOV.UK dividend tax, 2026).
The logic is fair, even if it stings. You drew money out that you never repaid, and had you taken it as a dividend at the time you would have paid dividend tax anyway. The write-off is the company giving up its right to repayment, so the system treats it as the distribution it always economically was. The tax on Boulton's £91,802 came to £34,823, close to the 38% you would expect at the top of the dividend rates.
Does liquidation wipe the slate clean?
No, and this is the belief I spend the most time correcting. Directors tend to think the company and its liabilities vanish together at liquidation, so a loan owed to a dead company must be a dead loan. The release is exactly what triggers the charge. The debt does not evaporate quietly. It is extinguished by a positive act - the liquidator agreeing to take less - and that act is the taxable event.
This matters because liquidation is common and rising. There were 18,525 creditors' voluntary liquidations in the UK in 2025, around 77% of all company insolvencies, with the past four years posting the highest CVL numbers since the series began in 1960 (Insolvency Service, 2025). One in 190 companies on the register entered insolvency that year. A meaningful share of those carried an overdrawn director's loan, and most of those directors will assume, wrongly, that they owe nothing once the company is struck off. HMRC is also getting better at spotting these movements, which is the whole point of the proposed close-company reporting of payments to participators.
Was the "without admission of liability" line worth anything?
For the tax treatment, no. The settlement agreement said the £60,000 was paid "without admission of liability", and Mr Boulton leaned on that phrase to argue the write-off was not really a write-off. The tribunal held that whether the wording carried legal weight was a separate legal question with no bearing on the tax analysis.
What mattered for tax was substance: a debt was released, and s.415 follows the release, not the label the lawyers put on the settlement deed. I see this confusion a lot. Clients reach for the comfort of a phrase in a legal document and assume it controls the tax outcome. It rarely does. The tax code looks at what economically happened - money left, money was not repaid, the right to repayment was given up - and prices that, whatever the deed says.
Where did the £5,223 penalty come from?
From not declaring the amount after being told to. HMRC charged £5,223, which is 15% of the £34,823 of tax at stake, for careless conduct (Boulton v HMRC TC09846, 2026). The careless band is the lowest tier of penalty, but it was avoidable twice over.
The liquidator's letter expressly told him to declare the figure. He had two clean routes: follow that instruction and return the income, or, if he genuinely thought it was not taxable, put a white-space disclosure on the return setting out his position and why. A white-space note would not have made a wrong position right, but it would have shown a prudent taxpayer engaging with the question rather than ignoring it, and that is usually the difference between a penalty and none. Doing neither is what turned a tax charge into a tax charge plus a fine plus a tribunal he lost. It is the same lesson I drew from the R&D claim that collapsed when the advisor vanished: the tribunal rewards the taxpayer who documented their position.
What I tell a client heading into a CVL with an overdrawn loan
Three things, in order. First, settle the loan in full before liquidation if the cash exists, because a fully repaid loan account has nothing to release and nothing to tax. This is the cleanest exit and the one most directors do not realise is available to them.
Second, if full settlement is not possible, plan for the income tax charge on the written-off portion to land on your Self Assessment in the year of release, and budget for it at dividend rates. I would rather a client sees a £34,000 bill coming than meets it in a discovery assessment three years later. Third, whatever the position, make a white-space disclosure on the return. I treat the liquidator's "effectively written off" letter as the starting gun for a tax event, not a courtesy note to file and forget. For the underlying rules, my note on how director's loan accounts are taxed sets out the s.455 and s.415 machinery in full.
Frequently Asked Questions
Do I have to pay income tax on a director's loan written off in liquidation?
Yes. When a liquidator releases or writes off an overdrawn director's loan for less than its balance, the unpaid amount is taxed on you as income under s.415 ITTOIA 2005, at dividend rates. Boulton confirms liquidation does not remove the charge - the release is what triggers it.
What is s.415 ITTOIA 2005 and how does it apply to an overdrawn loan?
Section 415 charges income tax on a participator when a close company releases or writes off a loan made to them. The released amount is treated as a distribution and taxed at the 2025-26 dividend rates of 8.75%, 33.75% or 39.35% above the £500 dividend allowance. It applies whether the write-off happens in normal trading or through a liquidator.
If the settlement says "without admission of liability", is the write-off still taxable?
Yes. The tribunal in Boulton held that the "without admission of liability" wording was a legal question separate from the tax treatment. Section 415 follows the substance - a debt released - not the label in the settlement deed. The phrase gives no protection against the income tax charge.
How do I avoid the tax charge on my director's loan before liquidation?
Repay the loan account in full before the company is liquidated. A fully repaid loan has nothing to release, so s.415 does not bite. If full repayment is not possible, you cannot avoid the charge, but you can plan for it and disclose it cleanly to reduce penalty risk.
Can HMRC come back years later if I did not declare the write-off?
Yes. In Boulton the loan was released in 2020 and HMRC opened a discovery assessment in February 2023. A discovery lets HMRC assess outside the normal enquiry window where income was not declared, and a missing white-space disclosure makes a penalty more likely.
If your company is heading toward liquidation with an overdrawn director's loan account, the time to deal with the tax is now, not when the discovery assessment lands. Get in touch and I will run through your loan account position and the options before the liquidator's letter forces the timing.