What is a close company for tax purposes?
Answered 11 March 2026
I have sufficient sources to provide a comprehensive answer. Let me compile the response.
What is a Close Company for Tax Purposes?
What the law says
The statutory definition of a "close company" for Corporation Tax purposes is found in CTA 2010, s.439. A close company is a company in relation to which Condition A or Condition B is met:
-
Condition A: The company is under the control of:
-
5 or fewer participators, or
-
participators who are directors.
-
Condition B: 5 or fewer participators, or participators who are directors, together possess or are entitled to acquire rights that would entitle them to receive the greater part of the assets available for distribution on a winding up of the company (with or without disregarding loan creditor rights).
Key terms are further defined in CTA 2010:
- "Control" — ss.450–451
- "Director" — s.452
- "Loan creditor" — s.453
There are exceptions to this definition at ss.442–447 (companies which are not to be treated as close companies).
For Capital Gains Tax purposes, TCGA 1992, s.288(1) provides that "close company" has the same meaning as in Chapter 2 of Part 10 of CTA 2010.
For Inheritance Tax purposes, IHTA 1984, s.102 essentially adopts the same Corporation Tax meaning.
HMRC guidance / practice
HMRC summarises the definition as follows: a company will generally be a close company if it is under the control of five or fewer participators, or under the control of participators who are directors.
A participator is anyone who possesses or is entitled to acquire share capital or voting rights in the company, and can also include a loan creditor.
HMRC also notes the following additional points:
- A quoted company may still be close where the voting power of all its principal members exceeds 85% of total voting power, or where less than 35% of voting power is held by the public (CTA 2010, s.446).
- A company is not close if it is controlled by a company which is not itself a close company, or by two or more companies none of which is a close company.
- For IHT purposes, the definition can apply to a non-UK resident company if it would be regarded as close were it UK resident.
- A company can also be regarded as close if more than half of its apportionable income can be apportioned to five or fewer participators under a shortfall direction.
Consequences of being a close company
Being a close company has several tax consequences, including:
- Expenses incurred by a close company in providing benefits (accommodation, entertainment, services, etc.) to a participator are treated as a distribution to that participator.
- Transfers of value by a close company for IHT purposes are apportioned among participators as if each had made a transfer of value.
Citation sources
A ‘close company’ is defined for Inheritance Tax (IHT) by IHTA84/S102 and essentially means a company which would be a close company within the meaning of the Corporation Tax Acts. Apart from specified exceptions it is a UK company in broad terms controlled by either five or less participators (individuals or bodies corporate) or by participators (however many there are) who are directors. A participator is defined by FA72/S303 as anyone who possesses or is entitled to acquire share capital
Part 23 Company distributions Chapter 4 Special rules for distributions made by certain companies Close companies Certain expenses of close companies treated as distributions 1064 1 This section applies if a close company incurs an expense in, or in connection with, the provision for any participator of— a living or other accommodation, b entertainment, c domestic or other services, or d other benefits or facilities of any kind. 2 The company is treated for the purposes of the Corporation Tax Ac
Part 10 Close companies Chapter 2 Basic definitions Meaning of “close company": general “Close company” 439 1 For the purposes of the Corporation Tax Acts, a “close company” is a company in relation to which condition A or B is met. 2 Condition A is that the company is under the control— a of 5 or fewer participators, or b of participators who are directors. 3 Condition B is that 5 or fewer participators, or participators who are directors, together possess or are entitled to acquire— a such rig
TCGA92/S13* applies to gains made by companies which are not resident in the UK and would be close companies if they were resident in the UK. TCGA92/S288(1) provides that for Capital Gains Tax purposes close company has the same meaning as in Chapter 2 of Part 10 of CTA2010. In general a company will be a close company if it is under the control of five or fewer participators or it is under the control of participators who are directors. For further guidance on the definition of close company se
PART IV CLOSE COMPANIES Transfers by close companies Charge on participators. 94 1 Subject to the following provisions of this Part of this Act, where a close company makes a transfer of value, tax shall be charged as if each individual to whom an amount is apportioned under this section had made a transfer of value of such amount as after deduction of tax (if any) would be equal to the amount so apportioned, less the amount (if any) by which the value of his estate is more than it would be but