Loans written off

By Tolley

The following Personal 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?
  • Interaction of the distribution treatment with the temporary non-residence rules

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 are discussed in detail in the Interest-free and low interest loans 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 of the loan.

If the loan is made to a director or employee, the amount of the loan released will be treated as employment income. See the Interest-free and low interest loans guidance note. However, if the loan is made to a shareholder and the company is a close company, 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, Part 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, Part 7A applies, then the normal rules, as described below, apply. The rules are discussed in detail in the Disguised remuneration ― overview guidance note (subscription sensitive).

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, or
  • any number of directors who are also participators

CTA 2010, s 439 (subscription sensitive)

These terms are defined below.

Overseas resident companies and quoted companies

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