Loans written off

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

  • Loans written off
  • What is a close company?
  • What are the implications of a close company making a loan?
  • Repayment of the loan
  • What happens if the loan is written off by the close company?

Companies sometimes provide directors, employees or shareholders with low interest (or interest-free) loans either as part of the reward package or on special occasions to help the individual meet significant expenditure. The employment income implications of these loans are discussed in detail in the Loans provided to employees guidance note.

Normally the loan is repaid, however occasionally the company may decide to write off (release) the loan, meaning the individual does not have to pay back the balance.

If the loan is made to an employee (including a director), the amount of the loan released will be treated as employment income. However if the loan is made to an employee who is also a shareholder and the company is a close company which has been taxed in respect of the loan, the release of the loan is treated as dividend income and taxed accordingly (see below).

Remember that, as with any other kind of employment reward, if the loan is provided by a third party, rather than the employer, it is worth considering whether the disguised remuneration provisions in ITEPA 2003, ss 554A–554Z21 (Pt 7A) apply, as those rules have priority over most of the other rules for taxing employment income. If there is no third party, or one of the exemptions from ITEPA 2003, ss 554A–554Z21 (Pt 7A) applies, then the normal rules, as described below, apply. The rules are discussed in detail in the Disguised remuneration ― overview guidance note.

What is a close company?

A close company is a company which is resident in the UK and is controlled by either:

  • five or fewer participators
  • any number of directors who are also participators

CTA 2010, s 439

These terms are defined below.

Overseas resident

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