What are the rules on loans to participators?

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# Loans to Participators

## What the law says

### The Charge (CTA 2010, s.455)

Section 455 CTA 2010 applies where a close company makes a loan or advance to:
- **(a)** a relevant person who is a participator in the company or an associate of such a participator;
- **(b)** the trustees of a settlement, one or more of the trustees or actual or potential beneficiaries of which is a participator or associate; or
- **(c)** a limited liability partnership or other partnership, one or more of the partners in which is an individual who is a participator or associate of a participator.

A "relevant person" means an individual, or a company receiving a loan or advance in a fiduciary or representative capacity.

The charge is treated as if it were **corporation tax** on the company for the accounting period in which the loan is made, at a rate equal to the **dividend upper rate** (s.8(2) ITA 2007) for the tax year in which the loan is made (this replaced the previous flat rate of 25% for loans made on or after 6 April 2016).

The tax is **due and payable** on the day following the end of the period of 9 months from the end of the accounting period in which the loan was made.

A close company is also treated as making a loan where a person **incurs a debt** to the close company, or a **debt due to a third party is assigned** to the close company.

Where company C controls company D, a participator in C is also treated as a participator in D for these purposes.

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### Exceptions (CTA 2010, s.456)

Section 455 does **not** apply to:
1. A loan made in the **ordinary course of a money-lending business**;
2. A **trade debt** for goods or services, unless credit exceeds 6 months or is longer than that normally given to customers;
3. A loan to a **trustee of a charitable trust**, provided the loan is applied to the purposes of the charitable trust only (for loans made on or after 25 November 2015);
4. A loan to a **director or employee** (or director/employee of an associated company) where **all three** of the following conditions are met:
 - **Condition A**: the loan does not exceed **£15,000** (including other outstanding loans from the company or associated companies);
 - **Condition B**: the borrower works **full-time** for the close company or an associated company;
 - **Condition C**: the borrower does **not have a material interest** in the close company or any associated company.

If the borrower subsequently acquires a material interest while any part of the loan remains outstanding, the company is treated as making a fresh loan of the outstanding amount at that time.

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### Relief on Repayment, Release or Write-Off (CTA 2010, s.458)

Relief from the s.455 charge is available (on a claim) if:
- the loan or part of it is **repaid** to the company; or
- the whole or part of the debt is **released or written off**.

A claim must be made **within 4 years** from the end of the financial year in which the repayment, release or write-off occurs.

Where repayment, release or write-off occurs **on or after the date the s.455 tax became due**, relief is **deferred** and cannot be given until the end of the period of 9 months from the end of the accounting period in which the repayment/release/write-off occurred.

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### Income Tax Charge on Release or Write-Off (ITTOIA 2005, s.415)

Where a company releases or writes off a loan that was chargeable under s.455, **income tax is charged on the borrower** under s.415 ITTOIA 2005.

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### Loan Relationships: No Debit on Release (CTA 2009, s.321A)

Where a loan gives rise to a s.455 charge and the debt is released or written off, **no loan relationship debit** may be brought into account by the company in respect of that release or writing off (for debts released or written off on or after 24 March 2010).

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### Qualifying Asset Holding Companies (QAHCs)

Special provision is made by FA22/Sch 2/Para 37 to apply the loans to participators rules to **all QAHCs**, even when they are not close companies.

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## HMRC Guidance / Practice

### Nature of the Charge

HMRC regards s.455 (and s.464A) as **essentially anti-avoidance provisions** creating a temporary tax charge designed to dissuade participators and their associates from extracting funds from the company other than as remuneration or dividends.

### Dual Charges

A s.455 charge on the **company** does not replace any charge on the **individual** recipient. Loans to directors or employees who are participators may also give rise to a beneficial loan charge under s.175 ITEPA 2003.

Where a loan is released or written off, the s.415 ITTOIA charge takes **priority** over any s.188 ITEPA charge; the same amount should not be charged under both provisions.

### Loans to Trusts

For both pre- and post-FA13 periods, loans to trusts (including employee share scheme trusts, EBTs, interest in possession trusts, and EFRBSs) may be chargeable under s.455 depending on the facts. Each trustee is considered separately (ITA 2007, s.474 does not apply for s.455 purposes).

### Relief and Timing

Where a loan is repaid, released or written off before the s.455 tax falls due (i.e. within 9 months of the end of the accounting period), the company will not need to pay the s.455 tax at all. This takes many companies outside the charge where, for example, loans are fully repaid by remuneration or dividends once the accounts reveal the extent of the indebtedness.

### "Bed and Breakfasting" Anti-Avoidance

HMRC is alert to arrangements where participators make a **temporary repayment** of a loan around the accounting period end or the 9-month due date, only to re-borrow shortly afterwards. HMRC will challenge such arrangements on the basis that no genuine repayment was made. For repayments made on or after **20 March 2013**, specific legislative provisions counter bed and breakfasting.

### Arrangements Conferring Benefits (s.464A)

FA13 inserted s.464A CTA 2010 (a TAAR) to charge extractions of value that do not technically amount to loans/advances but confer a benefit on a participator or associate as part of tax avoidance arrangements. This mirrors the s.455 regime and is subject to the same bed and breakfasting provisions.

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