A close company is one that is controlled by five or fewer participators (and their associates), or by participators who are directors. A shareholder is a participator.

When a close company makes a loan to or advances money to a participator (or an associate) a charge arises on the company equal to 25% of the loan or advancement. Relief from this charge is available when the loan/advancement is repaid or the loan is written-off.

In the past it was possible to avoid the effect of these rules in certain circumstances as follows:

  1. A loan could be made to an intermediary such as a partnership containing both individuals and non-individuals. The partnership would not be a 'participator' or an 'associate' for these rules.
  2. A participator and a close company of which they are a participator may be members of a partnership. If the partnership made a loan to the participator it was contended that this was not caught.
  3. The close company made a loan to an individual participator. The loan was repaid before the corporation tax needed to be paid. Shortly after this a 'new' loan was issued.

Proposals

There are three changes which have been proposed to deal with the loopholes. These are effective from 20 March 2013.

  1. The rules will apply where the loan is made to any form of partnership in which a participator (or their associate) is a partner.
  2. The rules will apply to arrangements where value is extracted from a close company and a benefit is conferred on an individual (or their associate) who is a participator in that company.
  3. There will be a 30 day rule to deny relief for loans repaid where the amounts repaid and redrawn exceed £5,000. Where it applies, the repayments are treated as repaying the redrawn amounts in preference to the earlier loans. For loans exceeding £15,000 where arrangements are made to re-advance the loans at the time repayments are made, there is no time limit. However in both cases if the repayments result in an income tax charge on the individual (for example due to the repayment being made from company dividends or remuneration being voted), then these rules on the treatment of repayments will not apply.

Loans to participators remains a very hot topic as the Government intends to consult later in 2013 on the structure and operation of the tax charge on such loans.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.