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BUSINESS - Loans to participators

Where a close company (or LLP) makes a loan (otherwise than in the ordinary course of a business) to an individual who is a participator or an associate of a participator, a tax charge of 32.5% is payable by the company should that loan remain outstanding nine months after the end of the accounting period. The charge applies to loans to directors who are also participators, to participators who are not directors, but it does not apply to directors who are not also participators.

A 'participator' may be a shareholder of the company whose interest in the company is more than 5% of the share capital but the definition also includes any person having a share or interest in the capital or income of the company. An ordinary trade creditor is not a 'participator'.

A 'close company' is a UK resident company under the control of:

(a) 5 or fewer participators, or

(b) of any number of participators who are also directors.

The rate of tax payable is the same as the higher 'dividend tax' rate at 32.5%. Should the charge be paid and then the loan subsequently be repaid, repayment can be claimed but will not be so until nine months and one day after the end of the company's accounting period in which the loan was repaid or reduced.

Where the loan has been made before the individual becomes a participator e.g. the loan is made to an individual who subsequently becomes a shareholder, then no charge is levied provided there is no link between the loan and the individual becoming a shareholder.

Material interest

As long as the participator is not also a director or employee in the company, there is no immediate tax charge for the participator. The scenario is different where the participator does not have material interest but works full time for company as there will be a charge under the benefit in kind rules should the loan exceed £15,000. There is also the possibility of a double income tax charge if the loan is subsequently waived or written off. In such circumstances not only will there be a benefit in kind on the granting of the loan but HMRC could deem the waiver to be a distribution to a participator or as earnings to a director or employee. However, there is provision in the legislation that prioritises the distribution treatment in this situation. There is no similar provision in the national insurance legislation and so this means that the income would be taxable as a distribution (dividend income) and Class 1 national insurance (both employer’s and employee’s contributions) be payable. In most small companies the director will be a shareholder entitled to vote at board level and so will also be a participator. Therefore, the distribution treatment will apply to any loans made and written off to the director or his family.

A participator who does not have material interest but works full time for company could receive small loans over several accounting periods such that eventually the aggregate exceeds the £15,000 exemption limit. HMRC's gives the example of a director receiving:

• £5,000 in accounting period 1

• £2,000 in accounting period 2

• 10,000 in accounting period 3

Individually these loans would qualify for the exemption but in total an amount of £17,000 has been received. HMRC state that the two earlier amounts in period 1 and 2 meet the requirements for the exemption and therefore the company is not charged on those amounts. However, the full amount of £10,000 in period 3 is chargeable as not meeting the condition under s456 CTA 2010 which states that:

• the amount of the loan in question plus the outstanding amounts of loans made to

the borrower does not exceed £15,000 (Condition A)

Details of the loan are required to be declared on the company tax return; the usual interest being charged on payments made late to HMRC.


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