HMRC has recently confirmed that the breadth of the rules that create a tax charge on indirect Loans to Participators in s.459 CTA 2010 is likely to affect a wide range of commercial scenarios including where Management Buyouts (MBOs) are financed by borrowing.

Board meeting

In June 2024 the Chartered Institute of Taxation (CIOT) made a submission to HMRC highlighting wider concerns about the application of s.459 CTA 2010, the Loans to Participator rules and their potential 'unfair' effect on legitimate tax planning, such as where an 'upstream loan' (an indirect loan) is made to fund a Management Buy Out (MBO).

HMRC responded in December 2024 confirming its view that the s.455 charge will apply to upstream loans and also noting that it would be likely that s.464A (provisions catching conferring benefits to participators) may well apply in any case.

The typical scenario where the rules may bite is where a new holding company is inserted above a trading company following an MBO (see Case Study 5: Management buyout via new holdco). The trading subsidiary would then fund the MBO partly by cash and dividends and there would be no problem with that. However, in the absence of distributable reserves in the subsidiary, the MBO would need to be partly funded by its new borrowing. The seller, who is likely to stay on will generally receive a combination of cash and loan notes (and so remains a participator). It is the repayment of those loan notes by the company's new borrowing that creates this indirect loan-to-participator problem.

Over many years this issue has been flagged up by different experts, yet only now has HMRC confirmed this wider interpretation.

HMRC's past guidance on this topic and its examples did not indicate that MBOs were specifically targeted and does not appear to be something that parliament had addressed in any detail when these rules were created. Although this potential problem has been known about for some time it is not one illustrated by HMRC in its manuals.

This will be a worry for many advisers, who may now wish to review cases where group borrowing is used to fund loan repayments. This part of legislation also extends in cases where a company has ceased to be close, see s.460 CTA2010. 

Useful guides on this topic 

Close company loans toolkit (loans to participators)
What is the Corporation Tax treatment when a close company makes a loan to a participator (director-shareholder)? How do the 'bed and breakfasting' rules work?

Close companies: Definitions & control
What is a Close company? What are the tax consequences? What is a Participator? What is meant by Control of company? What are the tests for Control?

Management Buyout: What are your options?
What are the most straightforward options to facilitate a retirement by the businesses' owners and the management of the company to take over or buyout? For example, what happens when two current directors/shareholders wish to retire and sell to a manager?

Directors' loan accounts: Toolkit (Freeview)
At a glance: HM Revenue & Customs (HMRC) provide a Director's loan toolkit for advisers. This is our own version with planning points. 

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

 

Squirrel advert

Loving our content? 😍
Sign up Now!
For free tax news, cases,
discounts & special tax briefings

We hope you are enjoying this amazing Practical Tax Database here at www.rossmartin.co.uk.

 

.