Implications of close company status

By Tolley
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The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Implications of close company status
  • Loans to participators
  • Benefits to participators
  • Corporation tax relief for interest on loans to participators from close companies
  • Relief for interest on loans to purchase shares in a close company
  • Attribution of gains

The main implications of close company status are as follows:

  • a penalty tax at a rate of 32.5% (25% for 2015/16 and earlier years) of the amount of any loans to the company’s ‘participators’ (broadly, its shareholders)
  • a tax charge at a rate of 32.5% from 2016/17 (25% for 2015/16 and earlier years) of the cash equivalent of benefits provided to ‘participators’, where these are not already taxed as earnings
  • where interest is due from a close company to a ‘participator’, there are special rules regarding the timing of corporation tax relief for the interest ― see the Connected party relationships ― late interest guidance note for an explanation of the rules
  • relief may be available for interest on loans taken out by individuals to purchase shares in a close company
  • where an overseas company would be close if it were in the UK, there are anti-avoidance rules which attribute gains by the company to its participators
  • there are anti-avoidance rules relating to transfers of value by close companies for IHT purposes ― see the Close companies guidance note (subscription sensitive)
  • the transactions in securities (TiS) rules, for income tax purposes, only apply to close companies ― see the Transactions in securities guidance note

These are discussed briefly below with links to further detailed notes where necessary.

Loans to participators

More on Close companies: