Close companies ― overview

Meaning of close company

The tax rules for close companies are intended to address those companies that are closely controlled (ie by the owners and their families) and therefore could be used to manipulate the tax position of its activities and its investors. Therefore, broadly speaking, most owner-managed or private family businesses will be close, but in many cases close company status may not be immediately apparent.

For further details, see the Definition of a close company guidance note or alternatively the Close Company Definition video.

Implications of close company status

The main implications of close company status are as follows:

1. •

   a penalty tax at a rate of 33.75% (32.5% before 2022/23) the amount of any loans to the company’s ‘participators’ (broadly its shareholders)

2. •

   a tax charge at a rate of 33.75% (32.5% before 2022/23) on the cash equivalent of benefits provided to ‘participators’, where these are not already taxed as earnings

3. •

   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

4. •

   relief may be available for interest on loans taken out by individuals to purchase shares in a close company

5. •

   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 (see the Gains attributable to participators in non-UK resident