Loans to Participators of Close Companies ~ Summary of recent changes

New rules have been implemented from 20 March 2013 covering the important area of loans and advances made by a close company to its participators i.e. its own shareholders. The changes could potentially affect around 1.3 million limited companies.

A ‘close company’ is defined as one controlled by five or fewer shareholders or else is director-controlled ~ so this would include most family-owned companies. Control for this purpose normally means owning more than 50% of the ordinary shares, with an individual shareholder deemed to own the shares of his or her associates ~ such as close family members. 

Outline of General Rules

Where a close company makes a loan to one of its ‘participators’ a tax charge (known as a S455 charge) is payable by the company to HM Revenue & Customs equal to 25% of the loan ~ but only where the loan has not been repaid within nine months of the company’s year end. The tax is due 9 months after the end of the accounting period, i.e. on the same date a company pays it normal corporation tax liability.

Where such a tax charge is paid it can only be recovered from HMRC nine months after the end of the accounting period in which the loan is repaid or released. 

Where a loan is written off by the company then the gross equivalent amount is treated as a dividend and taxable on the individual shareholder for the tax year in which the write-off occurs.

The main purpose of these long-standing rules was to try and deter such loans being made disguised as ‘quasi’ dividends and remuneration.

Taxable Benefit

It should be noted that where the shareholder is also a director and the outstanding loan is more than £5,000 at any time during the tax year (£10,000 from April 2014) a taxable benefit may arise on certain loans. Where a benefit applies it will be based on the difference between HMRC’s ‘official rate’ of interest and any interest actually paid. The calculated benefit will be liable to both income tax (at the director’s marginal rate) and a Class1A NIC liability at 13.8% on the company. A detailed consideration of these rules is outside the scope of this article.

The Changes in Detail

The recent changes, which all apply from 20 March 2013, are an attempt to close certain loopholes to avoid the tax charge in this area and also remove certain anomalies. These changes are covered in detail below:

1. ‘Bed and breakfasting’ of loan repayments curtailed

The new rule catches situations where a loan is repaid just before the end of the 9 month period with the purpose of avoiding the 25% tax charge only for the same funds to be withdrawn from the company shortly afterwards in an attempt to establish a ‘new’ loan.

There are two circumstances which are directed towards this abuse of the rules: 

(a) The ’30-day’ rule

Where within 30 days a repayment of a loan of more than £5,000 is followed by further withdrawals from the company of more than £5,000. In future the repayment will be treated as being matched with the later loan and not the original one. This will have the affect of leaving the original 25% tax charge intact.


A shareholder in a close company with a 31 March accounting date is loaned £20,000 on the 1 December 2013 by the company. On the 20 December 2014 (i.e. within 9 months of 31 March 2014) the loan is repaid. On the 5 January 2015 (i.e. within 30 days of 20 December 2014) a further £20,000 loan is made by the company to the same shareholder.

In the above case a S455 25% tax charge of £5,000 will be due on the 31 December 2014 on the original loan as it is deemed not to have been repaid within 9 months of 31 March 2014.

(b) The ‘arrangements’ rule

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


A close company with a 31 March accounting date makes a loan of £30,000 to a shareholder during August 2013 which is still outstanding on 31 March 2014. On the 20 December 2014 (i.e. within 9 months of 31 March 2014) the shareholder repays the £30,000 in full using a special 40-day bank loan. The bank loan is repaid on the 30 January 2015 via a new loan made to the shareholder by the company.

Although the fresh withdrawal is made more than 30 days after the original loan was repaid, there are clearly ‘arrangements’ for a new loan so the original loan would NOT be treated as having been repaid.

A S455 tax charge equal to £7,500 will therefore fall due on the 31 December 2014.

NOTE however that NEITHER of the above restrictions applies where a loan repayment gives rise to a charge to income tax in the hands of the shareholder, such as the payment of a bonus or a dividend. 

2. Extension of rules to partnerships and trusts

This addresses an anomaly whereby in future a S455 tax charge will apply to loans and advances made by a close company to any type of partnership where a member of the partnership is also a shareholder in the company.

Similarly where a loan is made by a close company to a trust, if either a trustee or a trust beneficiary is also a shareholder in the company, the 25% tax charge rule will now apply.

3. Arrangements conferring benefit

A new tax charge applies from 20 March 2013 where a close company is party to tax avoidance arrangements which ‘confer benefit’ on a shareholder (or their associate) of the company.


B is an individual shareholder of ABC Ltd, a close company and both are members of a partnership. Under the partnership agreement 75% of the profits are allocated to ABC Ltd on which corporation tax at 20% is paid. ABC Ltd leaves its profits undrawn within the partnership and B draws on them.

The above arrangement clearly ‘confers a benefit’ on B which is subject to a 25% tax charge as there was no S455 charge on ABC Ltd and no income tax charge on B.

If the funds had been transferred DIRECTLY from ABC Ltd to B then they would have been chargeable to income tax (as either remuneration or a dividend) or a S455 charge would have arisen if the transfer had been treated as a loan.

Recommended Action

It should be appreciated that the above examples illustrate relatively straightforward situations covered by the new rules. In practice much more complex situations are likely to arise, particularly those involving overdrawn directors’ loan accounts, and therefore it is vital that professional advice is sought.

Given that these important changes are likely to affect most ‘owner-managed’ companies we would be happy to discuss them in more detail and provide guidance on how to manage director’s loan accounts tax efficiently.

We can be contacted on 01633 215544 or email us on