The General Anti-Abuse Rule (GAAR) Panel has issued its opinion on the use of group loans to avoid the s.455 loan charge, finding that although there was a gap in the legislation, its exploitation was not enough to apply the GAAR and the steps remained a reasonable course of action for the group.

  • The arrangements involved a group of companies, where the parent company, Z, had one majority shareholder, M.
  • For the period in question, Z held a sub-holding company (Y), which, in turn, had an interest in X, under which sat  all of the active group companies. Z was an investment holding company and the minority interest was valued at over £100m.
  • After a series of drawings from Z in 2016 and 2017, M had a balance of nearly £11 million on his Director's Loan Account (DLA) as at 22 February 2017. Were this balance to still be outstanding as at 28 February 2017, there would be a s455 loan charge due.
  • In the run up to 22 February 2017, Y advanced a series of loans to M, who used these amounts to pay down all of his outstanding DLA balance with Z by 24 February 2017.
  • Whilst his DLA with Z now nil (and so no s455 charge arose), M had a new DLA with Y of more than £19 million.
  • In 2017, the DLA with Y increased to over £24 million and the issue of the outstanding loans was raised with the Group Chief Finance Office. Plans were made to start "cycling the Y loan to M into Z". If still outstanding at 28 February 2018, there would be a s455 charge on the Y DLA balance.
  • Subsequently, Y made loans to Z, who in turn lent the money to M in order to pay down the Y DLA balance and no s455 charge arose.
  • In 2019 steps were taken to clear the Z DLA balance, but these were outside of the scope of the panel review.

HMRC contended that a tax advantage arose to Z from not having to pay the s455 charge on the balance that initially arose in 2016.

The advisers to Z and M agreed that the loans prevented the s455 charge from arising but:

  • The loans were not abusive. There would have been no difference had the money been borrowed from a third party instead.
  • A commercial rate of interest was paid on the loans.
  • No value was permanently transferred to M from Z and this was never the intention.

The GAAR panel noted that their review was restricted to the arrangements undertaken between 2016 and February 2017. They noted that had they been considering the wider arrangements, their conclusions might have been different but that the HMRC notice only referred to this period. The panel found:

  • As the loans were interest bearing, this made their issue by Y a more reasonable course of action for the group. 
  • As such, the transactions in themselves were not contrived or abnormal steps.
  • The arrangements were in place to defeat the policy behind the anti-avoidance legislation preventing "bed and breakfasting" of close company loans to participators.
  • The legislation only refers to the company and makes no reference to loan repayments by other group companies. The panel believed that the arrangement sought to exploit a shortcoming in the legislation.
  • As the DLA balance was moved to another group company, the potential for a s455 charge remained and there was no extraction of value from the group that avoided a tax charge.
  • The subsequent steps to avoid a further s455 charge for Y were not contemplated until the following year and so these and the steps taken in 2016 and 2017 did not form a composite set of arrangements.

The panel concluded that the anti-avoidance legislation at s464A-D CTA 2010 had gap which did not cover group transactions but that this was not a matter that should be covered by the GAAR. Instead it found that the tax arrangements used were a reasonable course of action for the group and the GAAR did not apply.

Useful guides on this topic

General Anti-Abuse Rule:  GAAR (subscriber version)
What is the General Anti-Abuse Rule (GAAR)? When does it apply? 

Directors' loan accounts: Toolkit
HM Revenue & Customs (HMRC) have a director's loan accounts toolkit for advisers. This is our enhanced version with planning points. 

Close company loans toolkit (loans to participators)
This guide takes a detailed look at the Corporation Tax treatment when a close company makes a loan to a participator (director-shareholder). It also provides links to our guides for individuals on the making of loans to companies.

Close companies: Definitions & control
This guide goes over basic definitions. When is a company deemed "close" and what constitutes control?

External link:

GAAR advisory panel opinion of 26 April 2022: Repayment of a participator loan through transactions involving group companies

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