UK: Finance Bill 2013 Changes To The Close Company ‘Charges For Loans To Participators’

Last Updated: 11 July 2013
Article by Smith & Williamson


The 'loans to participator' rules only affect close companies, which are those under the control of five or fewer participators (principally shareholders), or any number of directors who are participators. They are designed to deter these companies from transferring value (for example by extending loans) to individual participators in the company, or associates of such participators, without incurring a tax charge. Subject to exceptions for certain loans or advances deemed not to be offensive, the tax charge arises on the company where the amount transferred is outstanding more than nine months after the end of the accounting period in which the loan or advance was made. The charge is equivalent to 25% of the amount of the loan or advance.

Until 20 March 2013 it was possible to circumvent these rules by arranging for:

(i) replacement loans that in effect repaid and re-advanced the loan so a charge didn't arise; or

(ii) the loan or advance to be routed through other entities (such as certain partnerships and trusts) so that the charge was otherwise avoided. Some of these strategies were quite widely used.

Finance Bill 2013 has expanded the scope of the rules to deal with this avoidance, setting limits on the tax effectiveness of recycling loans and catching loans or advances to a wider range of entities. As well as catching arrangements with a tax avoidance purpose, these changes could well catch arrangements that do not have a tax avoidance purpose.

The changes became effective from 20 March 2013 and are covered in more detail below. Please get in touch with your usual Smith & Williamson contact for a wider discussion of potential impact of these changes and (if the close company is involved in a partnership), further changes that will affect partnerships.


Subject to certain exceptions, the close company loan to participator rules operate to charge the company lender an amount as if it were corporation tax. The amount payable is equivalent to 25% of the amount of a loan or advance made to an individual, or a company receiving a loan or advance in a fiduciary or representative capacity (the borrowers here are termed 'relevant persons'), where either are participators or associates of such participators.

There are other aspects to the rules, excluding certain normal commercial or business practices and applying the rules in certain avoidance cases. Relief from the requirement to pay the 25% charge (or the right to a repayment of that amount) is available on a claim where the loan or advance is repaid or the debt is released or written off. In practice the tax was not required to be paid where there was no loan outstanding at the year end. If it was outstanding at the year end, then provided a claim was made and if the loan or advance was repaid within nine months of the accounting period in which the loan or advance was made there would also be no charge. Where it had been paid, the charge could also be recovered when the loan was repaid, subject to a claim being made. Finance Bill 2013 has expanded the scope of the charges to deal with arrangements that sought to circumvent the application of the charge. The changes became effective from 20 March 2013 and are covered in more detail below.

The changes effective from 20 March 2013

Three changes to the close company loan to participator rules are proposed to deal with avoidance of the charge on loans to participators and which are effective from 20 March 2013:

  • The relief for repayments (both for the charge on loans or advances to participators and the new charge on the value of benefits provided) will be restricted where there are subsequent loans or benefits made as follows.

There is a 30 day rule to for loans or benefits repaid where the amounts repaid and redrawn exceed £5,000 and the amounts redrawn are taken in an accounting period subsequent to the accounting period in which the repayments are made. If the rule applies the repayments will be treated as repaying the new amounts drawn in preference to the previous advances.

Even where the 30 day rule does not apply, if the amounts outstanding are £15,000 or more at the time of repayment, and at the time of repayment arrangements have been made for a new payment of £5,000 or more to be made, the repayments will be treated as repaying the new amounts drawn in preference to the previous advances.

However neither of the restrictions applies where an income tax charge arises on the person by reference to whom the loan, advance or benefit was a chargeable amount. It is understood that the income tax charge has to arise on the repayment to the company (for example as a result of approving remuneration or dividends to clear the loan, advance or benefit). It will not be sufficient for the funds from which the repayment is made to have borne income tax as a result of another source.

This change is effective for repayments and repayments (with respect to loans, advances or benefits) made on or after 20 March 2013.

  • The loan to participator charges will apply to arrangements where the close company is a party to tax avoidance arrangements and a benefit is conferred (directly or indirectly) on an individual who is a participator (or their associate) in the close company as a result of those arrangements. The change is effective for arrangements to which the close company becomes a party on or after 20 March 2013.

"Benefit" has not been defined. However, we understand this does not catch arrangements where the sole objective is tax-efficient financing of partnership working capital by leaving a corporate partner's profit allocations undrawn.

Relief will be available where there is an appropriate payment in respect of the value of the benefit received.

  • The loan to participator charge will apply where the loan is made to any form of partnership in which a participator (or their associate) who is a 'relevant person' (a relevant person is either (i) an individual or (ii) a company or trust acting in a fiduciary capacity), is a partner.

The charge will also apply to loans to trustees of a settlement where one or more of the trustees or actual or potential beneficiaries is a relevant person (or their associate) who is a participator. The change is effective for any loans or advances made on or after 20 March 2013.

As currently drafted, in addition to catching avoidance arrangements, the measure will also catch commercial arrangements for loans from close companies to partnerships where there is no intention of tax avoidance behind the loan.

Required action points for those affected

All close companies should be considering the following action points:

  • Reviewing any finance arrangements with partnerships, LLPs and trusts which have partners, members, trustees or beneficiaries who are participators or their associates;
  • Reviewing control procedures over loans or advances to participators and their associates;
  • Considering whether any arrangements involving the extending of a benefit to a participator or their associate are caught by the new anti-avoidance.

In assessing any actions, consideration will need to be given to the general anti-abuse rule (GAAR) which will become operative on the date of Royal Assent of Finance Bill 2013 (expected to be some time in July). This is a self-assessment measure which will counteract tax arrangements (arrangements with a main purpose of tax avoidance) where those arrangements cannot reasonably be regarded as a reasonable course of action. The transitional rules mean the GAAR will only apply to 'tax arrangements' entered into on or after the date of Royal Assent of Finance Bill 2013.

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.

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