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Autumn Budget 2024: Changes to Close Company loan rules

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From an individual perspective, the proposed removal of a slight loophole in the legislation around loans made by a Close Company has no direct impact. However, for companies, the economic impact as between the company and the individual can now become blurred.

Current law

Currently, loans to participators (essentially those owning more than 5% shareholding in a company) remaining outstanding after nine months of the year end result in a tax charge on the company. The charge, known as s455 tax, is at a rate of 33.75% of the outstanding loan balance and is not repaid until nine months after the accounting period in which the loan is repaid. The individual recipient would be taxed as receiving a benefit in kind in the form of an interest-free loan but other than that, would not be taxed on the advance.

What is the mischief at play?

Well, really the point was that the charge was avoided where the payment was made within the nine-month time limit.  Whilst there have always been anti-avoidance rules in place to prevent tax avoidance using indirect loans and short-term recycling, technically the rules only really caught stand-alone company actions. It became apparent that some group companies were using a form of internal repayment by one company and immediate advance by another to circumvent the rules.

Proposed revisions

Legislation will be introduced in the Finance Bill 2024-25, applicable from 30 October 2024, to ensure that there is a Target Anti-Avoidance Rule in place catching companies and their shareholders where there is an attempt to avoid the s455 charge on any extractions. Where this applies, the tax is payable whether or not there has apparently been a repayment, or a repayment is subsequently made.

Where companies have been compliant with the rules without trying to plan around them, there will be no impact at all.

It is calculated that these measures will result in additional sums due to the Treasury although as s455 tax is repayable in due course, this is only a timing benefit.

Contact Mercer & Hole

If you would like to discuss the above please contact Jacqui Gudgion or a member of the Corporate and Business Tax team.

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