CFM5603a - Taxing loan relationships: connected persons and late interest: meaning of participator

Connection through participation: participator

The definition of participator follows that used in ICTA88/S417, which is as follows.

A participator in a company is a person (individual or company) who has a share or interest in the capital or income of that company. It includes

• any person who possesses, or is entitled to acquire, share capital or voting rights in the company
• any loan creditor of the company
• any person who possesses, or is entitled to acquire the right to shares in company distributions, including premiums payable to loan creditors on redemption
• any person who possesses, or is entitled to acquire the right to secure that the company’s income or assets (present or future) will be applied directly or indirectly for his or her benefit.

FA03/SCH37/PARA2 extends the meaning of ‘participator’ in relation to interest which would ordinarily, but for the late interest rules in FA96/SCH9/PARA2, be treated as accruing on or after 9 April 2003. The effect of the change is that a person who is a participator in a company which controls another company will be treated as a participator in that other company for the purposes of FA96/SCH9/PARA2. However, a person is not a participator for the purposes of FA 1996/SCH9/PARA2 (1B) if they are only a loan creditor, having no other rights or interest.

Example 1

Kit Gerrard lends £500,000 to PK Ltd, a close company. Kit owns no shares or other rights in the company.

Kit is not a participator in PK Ltd under FA96/SCH9/PARA2 and is not connected.

Example 2

Kit Gerrard lends £500,000 to PJ Ltd, a close company. Kit owns one ordinary share of the 3,000 issued.

Kit is a participator in PJ Ltd under Para 2 and is connected.

Example 3

Kit Gerrard lends £500,000 to XY Ltd, a wholly owned subsidiary of another company, PJ Ltd. Kit owns one ordinary share of the 3,000 issued in PJ Ltd.

Kit is a participator in XY Ltd under Para 2 (by virtue of FA03/SCH37/PARA2) and is connected whether or not PJ Ltd is close.