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Article contributed by ACCA

New legislation will tackle avoidance of the tax charge on loans from close companies to participators.

New legislation will be introduced in Finance Bill 2013 to tackle avoidance of the tax charge (under section 455 of CTA 2010) on loans from close companies to participators, specifically in respect of payments made via an intermediary such as a partnership or trust.

Although section 455 currently also applies to loans from close companies to partnerships in which all the partners are individuals and at least one of them is a participator in the close company, and to indirect loans, including the use of a non-close company in the structure, to participators, some avoidance arrangements have sought to exploit perceived loopholes in the legislation by making loans via intermediaries.

In particular some arrangements involve making loans and other payments to participators via LLPs, partnerships or trusts in which the close company and at least one participator in the close company is a member, partner or trustee.

Other arrangements try to avoid section 455 by way of a repayment of the loan before the end of the nine month period from the end of the accounting period, which is the deadline for triggering the charge, shortly followed by a withdrawal of a ‘new’ loan (referred to as ‘bed and breakfasting’).

The government has introduced three changes to the existing rules in order to:

  • put beyond doubt that loans via various intermediaries are within the scope of the charge
  • bring transfers of value other than loans within the scope of the charge when there is a corresponding receipt of value by the participator
  • reinforce repayment rules so that only genuine repayments are given relief.

The new legislation will apply the section 455 charge to any loans from close companies to participators made via partnerships (including LLPs) in which the close company is a partner/member and at least one partner/member is both a relevant person and a participator (or associate of a participator). Appropriate exceptions and relief from the charge will also be introduced. Similar provisions will apply to certain trustees.

Where there is an extraction of value from a close company and the value is transferred to a participator, there will be a 25% charge on the close company on the amount of the payment. There will be exceptions and relief if the value transferred is later returned to the close company.

The new repayment provisions deny relief, subject to de minimis limits, if repayment and re-drawings take place within a short period of time, or if there are arrangements or there is an intention to make further payments at the time the repayment is made (subject to the re-drawing subsequently taking place).

The new measures will apply to loans, payments, repayments and arrangements made on or after 20 March 2013.