The Chartered Institute of Taxation (CIOT) has recently highlighted concerns about the application of loan to participator rules and their potential 'unfair' effect on legitimate tax planning, such as where an 'upstream loan' is made to fund a Management Buy Out (MBO). 
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This is a freeview guide.

Subscribers can access the Detailed version, which includes a case study illustrating how a s.455 charge could arise in a Management Buy Out (MBO) transaction.

  • Under s.455 CTA 2010, a Close company is liable to a tax charge, often referred to as a s.455 charge, if a loan is made to a participator (typically a shareholder) and it is not repaid within nine months after the end of the company’s accounting period.
  • The scope of the s.455 charge is extended by s.459 CTA 2010 to include arrangements where: 
    • A close company makes a loan or advance which does not otherwise give rise to any charge under s.455, and
    • A person other than the close company makes a payment or transfers property to, or releases or satisfies (wholly or partly) a liability of an individual who is a participator or an associate of a participator.
  • s.459 CTA 2010 does not apply where: 
    • The arrangements are made in the course of ordinary business.
    • The participator/associate is subject to Income Tax on the amounts received (e.g. as a distribution).
  • The s.455 charge aims to prevent tax avoidance schemes where loans are used to extract profits from companies without paying appropriate taxes.

CIOT's Concerns

  • CIOT's proactive submission to HMRC emphasises that whilst the s.455 charge is crucial for preventing tax avoidance, its current application could unfairly affect some commercial transactions, due to the extension of the s.455 charge by s.459 CTA 2010. 
  • They provide an example of a Management Buy Out (MBO) scenario:
    • Where the MBO team form a new company (Bid Co) to purchase the shares in a target company (Target Co) and shares and loan notes are issued as consideration to the vendor shareholders. 
    • To pay the vendor shareholders their consideration it is usual for: 
      • Target Co to pay a dividend up to Bid Co, and Bid Co to use the funds to pay the vendor shareholders,
      • Target Co to loan the money to Bid Co, an upstream loan, which can be used to pay the vendor shareholders. 
  • Under the second option a close company has loaned the funds to Target Co which will be used to make a payment to a participator (or an associate of a participator) a s.455 charge may arise because of the extension by s.459 CTA 2010. 
  • It seems unfair that a s.455 charge could potentially arise when the repayment of debt is funded by an intra-group loan, but not when it is funded by a dividend.


  • We have never seen HMRC seek to apply this point in practice, but the risk of s.459 CTA 2010 applying creates uncertainty when carrying out tax planning.
  • We eagerly await HMRC’s response, which we hope will bring clarity to this issue.

Editor's comments

Tax planning is complex. It's crucial to thoroughly consider all tax implications of the transaction to mitigate any risks. Please note that this scenario focuses solely on demonstrating the CIOT's submission point and does not cover all tax implications that need consideration.

 Useful guides on this topic 

Loans to participators pitfalls
The Chartered Institute of Taxation (CIOT) has recently highlighted concerns about the application of loan to participator rules and their potential 'unfair' effect on legitimate tax planning, such as where an 'upstream loan' is made to fund a Management Buy Out (MBO).

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External Link

CIOT's Proactive Submission: Loans to Participators Charge on Upstream LoansCIOT's Proactive Submission: Loans to Participators Charge on Upstream Loans