Capitalisation

I run a small accountancy tax advice practice. Most of my clients are self-employed or working in partnerships but I do have one or two “one-man” limited companies.

The director of one of these has pumped a large amount of money into the company in recent years to keep it solvent and to provide working capital. He has now asked me how this should best be structured on an ongoing basis.

The company is not in a position to repay the loan and I cannot imagine that it will be for the foreseeable future. Presumably the company can pay some interest on the loan to recompense the director.

I should be grateful if readers could advise on the level of interest that can be paid without there being any adverse tax consequences on the director or the company. Also must the company deduct tax from the interest?

In...