Finance Bill 2013 Changes To The Close Company ‘Charges For Loans To Participators’


The 'loans to participator' rules only affect close companies, which are those under the control of five or fewer participators (principally shareholders), or any number of directors who are participators. They are designed to deter these companies from transferring value (for example by extending loans) to individual participators in the company, or associates of such participators, without incurring a tax charge. Subject to exceptions for certain loans or advances deemed not to be offensive, the tax charge arises on the company where the amount transferred is outstanding more than nine months after the end of the accounting period in which the loan or advance was made. The charge is equivalent to 25% of the amount of the loan or advance.

Until 20 March 2013 it was possible to circumvent these rules by arranging for:

(i) replacement loans that in effect repaid and re-advanced the loan so a charge didn't arise; or

(ii) the loan or advance to be routed through other entities (such as certain partnerships and trusts) so that the charge was otherwise avoided. Some of these strategies were quite widely used.

Finance Bill 2013 has expanded the scope of the rules to deal with this avoidance, setting limits on the tax effectiveness of recycling loans and catching loans or advances to a wider range of entities. As well as catching arrangements with a tax avoidance purpose, these changes could well catch arrangements that do not have a tax avoidance purpose.

The changes became effective from 20 March 2013 and are covered in more detail below. Please get in touch with your usual Smith & Williamson contact for a wider discussion of potential impact of these changes and (if the close company is involved in a partnership), further changes that will affect partnerships.


Subject to certain exceptions, the close company loan to participator rules operate to charge the company lender an amount as if it were corporation tax. The amount payable is equivalent to 25% of the amount of a loan or advance made to an individual, or a company receiving a loan or advance in a fiduciary or representative capacity (the borrowers here are termed 'relevant persons'), where either are participators or associates of such participators.

There are other aspects to the rules, excluding certain normal commercial or business practices and applying the rules in certain avoidance cases. Relief from the requirement to pay the 25% charge (or the right to a...

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