Mar 312013

This is a summary of the changes made to the rules on close companies and how loans to participators are taxed.


A close company is, in technical terms, a company that has five or fewer “participators” 1. In layman’s terms, it is simply a company that is in the ownership of a small number of people –   it is their creature, to do as they bid. We use the term “participator” instead of shareholder, because there are other ways in which a person can profit from an interest in the company without taking equity.

There are rules to ensure that one cannot artificially bump up the number of participators. For example, if we have five individual shareholders A, B, C, D and E and a corporate shareholder XCo, we would expect this to mean there are six participators, so that the company is not close. But if XCo happens to be E’s personal company, we are down to five again.

What are the new rules?

A loan or advance by a close company to a participator is subject to a tax charge of 25% 2. This charge is borne by the company, unless it is repaid before the due date for payment of the company’s corporation tax bill 3. There are three amendments to the rules:

  • A tightening of the condition that a loan made via an intermediary is also subject to a tax charge;
  • An extension of the type of benefit caught by the rules – currently it is only loans and advances that are taxed; and
  • The introduction of a bed and breakfasting rule to prevent rollover loans. This involves repaying the amount payable  just before the due date, and then renewing the loan. BY paying the loan off before the due date, a tax charge is avoided.

Loans to intermediaries

Currently, a loan or advance is only caught if it is made to an individual, or a company in a representative or fiduciary capacity 4. Loans made via an intermediary are also caught 5 – however, there was some uncertainty about the case where a loan was made to a partnership (including an LLP) or trustee of a settlement.

The argument for partnerships is as follows.

A partnership is a “look through” vehicle. A loan to a partnership is a loan to all the partners. If they all happen to be individuals, then the loan has been made to an individual(s) and falls within the close company rules.

However, if one were to introduce a new corporate partner the position changes. The loan cannot be said to be made to individuals because of the presence of this one corporate partner – even if the latter’s stake in the venture is miniscule. (Can one not argue that the loan is made to individuals to the extent that these people make up the partnership?)

Close company loan to partnership

The argument for trusts is similar.

The Budget amendment will remove all doubt that this type of intermediary structure is no longer viable.

Extension to the type of benefits other than loans or advances

This appears to be other types of transaction involving money, but which don’t constitute a loan or advance.  The following example is cited by HMRC.

We have an individual shareholder M in close company C. C and M are also in partnership, with all the revenue profits allocated to C. C leaves profits undrawn on capital account or draws profits and pays the money back as a capital contribution. M benefits if M can draw on capital account.

The argument is that this does not constitute a loan or advance to M. However, in HMRC’s eyes it does constitute an untaxed extraction of value. So now the rules are being tightened to include all transactions whereby value has been extracted from the company.

  Close company extraction of value

Bed and breakfasting

This is aimed at the scenario, when a loan is repaid just before the “due and payable” date to avoid a tax charge, and then another loan is advanced – in effect a rollover situation. The new loan may or may not be greater than the old. By continually rolling over the loan in this way, the recipient is effectively receiving a permanent tax free benefit.

The new bed and breakfast rules put a stop to that.

  • The new 30 day rule states that if the loan, advance or any other extraction of value is repaid, no further advances can be made for at least 30 days without incurring a tax charge. There is a de minimis £5,000 threshold – repayments in value that are less than this amount are not caught;
  • However, rollovers that technically fall outside the 30 day rule can still be caught,  where there are amounts outstanding valued to at least £15,000. If a repayment is made, and there are arrangements, or an intention, to redraw an amount – a tax charge can still be incurred, even if the redrawing takes place more than 30 days later.


HMRC Manual containing the loans to participator rules – CTM61500.

HMRC Technical Note on Close Company Loans to Participators (Loophole Closures).

  1. CTA 2010 s 439.
  2. CTA 2010 s 455(2).  However, loans made in the ordinary course of business are excluded – CTA 2010 s 456.
  3. CTA 2010 s 458.
  4. CTA 2010 s 455(6).
  5. CTA 2010 s 459.
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Satwaki Chanda

Satwaki Chanda

Satwaki Chanda is a tax lawyer with a First Class degree in Mathematics. Called to the Bar in 1992, he is the Editor of Tax Notes.
Satwaki Chanda

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