Loans from Close Companies to their Participators

On the 20 March 2013 the Government announced their intention to bring in legislation to counter various arrangements under which close companies seek to avoid a charge to tax when making loans to their participators.  They also confirmed that they will be undertaking a wider review of loans to participators and it is understood that a consultation document will be published later this year.

There are three types of arrangements which the Government intend to nullify on the grounds that such ploys seek to circumvent the original legislation:

  1. Some companies are known to have made loans to their shareholder via certain forms of intermediary in an effort to avoid the tax charge
  2. As the legislation only applies to loans or advances of money, companies have transferred value to their shareholders in ways which do not involve monetary loans or advances, and
  3. Companies have, on a regular basis, sought to exploit the rules where a loan is repaid to the company under what is often termed “bed and breakfasting” arrangement i.e. where the loan is repaid by the shareholder before the tax charge becomes payable, only for the company then to make a new loan to the shareholder shortly afterwards.

It is the third of these types of arrangements which appear to be most commonly used and which the Government has concentrated on introducing provisions to counter.  Thus, for example, loans to participators are repaid by the end of the company’s accounting period or in the 9 months prior to the tax due payment date in order to prevent the charge.  Shortly after this repayment the shareholder redraws the money and so has lost the use of it for only a short period and in fact never had intended the repayment to be lasting.  In these circumstances the Government is introducing legislation which will treat the loan as never having been repaid unless it is deemed to have been repaid permanently.

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