Loans to participators: old pitfalls still exist

/ 18 June 2013

David Whiscombe

In the excitement of the Budget Day extensions to the s455 charge, practitioners should not overlook the ample elephant traps afforded by the existing legislation.

The most egregious of these is in s459. This is the provision which, broadly speaking, catches loans which a close company makes to a participator through indirect arrangements. For example, imagine that Mr X owns all the shares in X Ltd. If X Ltd were to make a loan to him, a charge under s455 would obviously arise. So he might come up with the Cunning Plan of having X Ltd make a loan to his friend Mr Y on the strict understanding that Mr Y will use the funds to make an equivalent loan to Mr X. Cunning Plan, Sir Baldrick: but it doesn’t work – that is precisely what is countered by s459.

However s459 goes much further than this: it applies in any case where there are arrangements under which a close company makes a loan which is not itself caught by s455 and some person other than the close company “makes a payment, or transfers property to, or releases or satisfies (in whole or in part) a liability of” a participator in the company, unless the payment etc. is already charged to Income Tax in the hands of the participator.

This can lead to unexpected results. Using the example of Mr X, X Ltd, and Mr Y, consider what happens if Mr Y buys, say, an investment property from Mr X resulting in a capital gain for Mr X on which Mr X pays tax at 28%. Imagine that Mr Y borrows some of the purchase price from X Ltd on fully commercial terms. There has been no tax avoidance, no “indirect loan” and Mr X has paid tax on what he receives. Yet the loan to Mr Y is nonetheless caught by s459.

Thus in any case where a close company makes a loan it is not sufficient merely to ensure that the borrower is not a participator (or an associate of a participator) in the company: one must also ask the further question – to what use is the loan to be put?

David Whiscombe


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