HMRC has been updating its company tax manuals in relation to close company loans to participators.

It confirms the following: 

A loan to a shareholder which is written off is treated as follows:

  • To a shareholder: treated as an income distribution
  • To a shareholder who is also an employee: treat as income distribution, but apply NICs.

  • In passing (we spotted one of these last week): watch the trap where the loan is made to a settlor and the close company is controlled by his trust. Trust capital then may revert to the settlor and the loan is caught be different rules and a section 633 ITTOIA 2005 tax charge is due instead.

    Note for our subscribers, see how this interacts with Unlawful, illegal or ultra vires dividends where an unlawful dividend is written off, or becomes a loan.

Indirect loans

More traps! Close companies should also be careful not to make indirect loans to participators. Section 419 (5) catches some loan arrangements, where the loan is not made directly to an individual participator in the company (or an associate of a participator), it applies where:

  • a close company makes a loan or advance which does not otherwise give rise to any charge under ICTA88/S419 (1),
  • some 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,


  • any person has made arrangements covering the loan and the payment, transfer, release etc.

HMRC gives these examples:

Example 1

Company D is a close company. Instead of making a loan directly to D, an individual participator, it makes it to an associated company, Company E. Company E then passes the loan to D. The loan by one company to the other is treated as if it had been made direct to D.

Example 2

Company T, a close company, makes a loan to A. A is an individual participator in Company W but not in Company T. Company W, acting in concert with Company T, then makes a loan to D, an individual participator in Company T. Company T and Company W have swapped loans to participators and are treated as if they had made loans to their own participators.

Management buy outs

A close company may make a loan to its new owners who then use those funds to pay the outgoing shareholders for their shares. HMRC notes this “a difficult area in which the facts are absolutely crucial, it is exactly the type of arrangement which should be caught by S419. The company’s own money is being used to buy out the existing shareholders.”

When section 419 applies the close company is taxed in the normal way.

This guidance and further planning points are included in our guide Close companies: tax planning and pitfalls