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Loan by close companies

Loan by close companies

What is a close company?

A 'close' company is a company owned and controlled by 5 or fewer individual participators or controlled by any number of participators who are also directors.

Here, these terms are defined as follows:

  • A participator is a shareholder, a person who has a right to become a shareholder or a 'loan creditor' of the company.
  • A loan creditor is someone who has lent money to the company but doesn't include a normal trade creditor.
  • Control means owning or having the right to own more than half the shares or more than half the voting power of the company.

Rules relating to loans from close companies are designed to prevent participators from enjoying tax-free funds disguised as loans from the company.

These rules can be found in section 419 in the Income and Corporation Taxes Act 1988. Hence, the liability is commonly referred to as 419 tax.


The rules apply to:

  • loans to participators who are individuals or trustees, but not companies;
  • loans to associates (e.g. relatives or partners) of participators; and
  • loans to partnerships, including limited partnerships and limited liability partnerships in which a participator or their associate is a partner. However, HMRC accepts that loans to Scottish partnerships (but not Scottish LLPs) aren't within its scope.

The rules can also apply where a company lends to its employee benefit trust.

The rules don't apply to loans to a director or employee of the company if:

  • the director or employee works full-time;
  • the loan plus all other outstanding loans to that person amount to less than £15,000; and
  • the director or employee doesn't own shares of more than 5% of the share capital of the company.

Under tax rules, the close company must:

  • pay HMRC tax equal to 25% of a loan made before 6 April 2016 or 32.5% of a loan made on or after 6 April 2016, unless the loan is repaid within the period of nine months and one day from the end of the accounting period in which the loan is made; and
  • claim to recover this tax from HMRC when the loan is repaid or written off by the company.

The liability to tax under section 419 is included in the company's Corporation Tax self-assessment, and it's payable under the normal corporation tax provisions.

When the loan has been repaid to the company, or when the company writes it off, the company can claim the section 419 tax back in its Company Tax Return. The person to whom the loan was made is liable to Income Tax in respect of it.

Detailed aspects

The loans by close company rules are subject to extensive detailed provisions. If your company is a close company and has made loans to participators, you should get professional advice on how this will affect the cash flow of your company.

Related services

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  • Shareholders agreement
    Compatible region(s): England Wales

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