Loans to participators

Produced by Tolley
Loans to participators

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Loans to participators
  • Making of loans to participators
  • Loans or advances that may attract a close company charge
  • Excluded loans
  • Repayment of loans to participators
  • Waivers of loans to participators
  • Corporation tax treatment of loan waivers
  • Income tax treatment of loan waivers
  • NIC treatment of loan waivers
  • Reporting loans to participators
  • More...

This guidance note deals with the rules regarding payment of tax, and making claims for repayment of tax on loans to participators. For information on the definition of close companies and other relevant definitions, please see the Definition of a close company guidance note.

For a summary of other tax implications of close company status, see the Close companies ― overview guidance note.

Making of loans to participators

For loans or advances made by a close company, a tax charge of 32.5% will apply if the loan was made otherwise than in the ordinary course of a business carried on by it, which includes the lending of money to any of the following:

  1. a person who is a ‘participator’ in the company or is an ‘associate’ of a participator

  2. a trust in which a participator or their associate is trustee or potential beneficiary, or

  3. an LLP or other partnership whose membership includes a participator or their associate ― this will catch, for instance, genuine commercial structures such as loans from related close companies to property development LLPs to fund new developments

The company must pay tax at 32.5% on the amount of the loan or advance that is outstanding nine months after the accounting period end in which itwas made. This rate aims to prevent an unfair tax advantage from being obtained from the difference between the rate of tax on loans and benefits, etc to participators, and the rate of tax on dividends.

The tax is due from the company as if itwere corporation tax chargeable for the accounting period in which the loan, etc was made and is therefore due at the same time as the corporation tax is due.

See Example 1.

Anti-avoidance legislation applies to prevent abuse of the rules. For example, structures involving a loan or advance made via an intermediary are also included.

See also Simon’s Taxes D3.401C.

Loans or advances that may attract a close company charge

The following are included in

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