The main implications of close company status are as follows:

  • a penalty tax at a rate of 32.5% for 2016/17 (25% for 2015/16 and earlier years) on the amount of any loans to the company's 'participators' (broadly its shareholders), see below
  • a tax charge at a rate of 32.5% for 2016/17 (25% for 2015/16 and earlier years) on the cash equivalent of benefits provided to 'participators', where these are not already taxed as earnings, see below
  • relief may be available for interest on loans taken out by individuals to purchase shares in a close company, see below
  • a tax on indirect benefits provided to close company participators where the company is party to tax avoidance arrangements (see the Indirect benefits conferred on participators guidance note (subscription sensitive))
  • where an overseas company would be close if it were in the UK, there are anti-avoidance rules which attribute gains by the company to its participators (see the Gains attributable to participators in non-UK resident companies guidance note (subscription sensitive))
  • there are anti-avoidance rules relating to transfers of value by close companies for IHT purposes (see the Close companies guidance note (subscription sensitive))
  • the Transactions in Securities (TiS) rules only apply to close companies (see the Transactions in securities guidance note)
  • prior to 3 December 2014, there were special rules regarding the timing of corporation tax relief for the interest where interest is due from a close company to a 'participator' (see the Connected party relationships - late interest guidance note (subscription sensitive) for an explanation of the rules, together with details of the repeal and commencement provisions)

Loans to participators

Implications for the company

The company must pay tax in respect of the amount of the loan or advance where a close company (other than in the ordinary course of a business carried on by it, which includes the lending of money) makes any loan or advances any money to an individual who is a 'participator' in the company or is an 'associate of a participator', and the loan is not repaid in full by the end of the chargeable accounting period in which it was made. The rate of tax is 32.5% for relevant loans made or benefits conferred by close companies on or after 6 April 2016, and 25% for loans made or benefits conferred before 6 April 2016. The rate of tax had remained unchanged for many years however Budget 2016 announced that the rate would increase in order to prevent an unfair tax advantage from being obtained from the difference between the rate of tax on loans and benefits etc to participators, and the rate of tax on dividends under the new dividend taxation regime from 6 April 2016 onwards. The tax is due from the company as if it were corporation tax chargeable for the accounting period in which the loan, etc was made. CTA 2010, s 455

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