CTM60160 - Close companies: tests: Meaning of "having a share or interest in"

The word ‘interest’ has multiple meanings. In the close company context, it typically means “a share or involvement in an undertaking” rather than a payment made to service an outstanding debt.

The word interest is used in two main parts of the legislation. The first is the definition of participator at CTA10/S454:

“For the purposes of this Part, “participator”, in relation to a company, means a person having a share or interest in the capital or income of the company.”

The second occurs in the definition of associate at CTA10/S448. The phrase is used a number of times in that section, but an illustrative example is:

“If [a person,] P has an interest in any shares or obligations of a company which are subject to any trust, the trustees of any settlement concerned [are associates of P]”.

The first definition expressly covers shareholders, but the second requires us to identify individuals who have an interest in the shares or obligations of a company “which are subject to any trust”. The effect is that, where a person does have an interest in shares through a trust, then the trustees of that trust are their associates.

In this context, the word interest covers both a legal and beneficial interest. For example, where shares in a company are held by trustees in a life trust, the trustees will have a legal interest in both the shares and the company itself. The beneficiaries and the remainderman of the trust have a beneficial interest in both the shares and the company. While the nature of a beneficiary’s interest may vary according to the terms of the trust, this is not generally of relevance to whether a beneficiary has an “interest” for the purposes of these provisions.

The close company tests are typically concerned with the rights and powers that an individual possesses. Therefore, it is not typically necessary to consider a beneficiary when determining whether a company is close or not, unless associates of the beneficiary are also participators (see examples below). However, if a close company makes a loan or advance to a beneficiary of a trust, and none of the exemptions apply (see CTM61530 and CTM61540), that beneficiary should be considered a participator and the loan balance should be subject to tax under CTA10/S455. The situation is mirrored if a close company provides a benefit to a beneficiary which is within the definition of distribution at CTA10/S1064.

Example 1

The shares in A Ltd are held by ten individuals, who all hold the same share capital, voting rights, rights to income distributions and capital in a winding-up (10% each).

If all the individuals were unconnected, then A Ltd would not be a close company.

If one of the shareholders, X, was the daughter of a non-shareholder, Y, and Y was the brother of a shareholder, Z, (so that Z was X’s uncle) the company would not be close. The shares of X and Z could still be attributed to Y for the purposes of CTA10/S451 to establish ‘control’, but Y is not a participator so cannot be included for the purposes of CTA10/S439.

If A Ltd were a close company for some other reason, then any loan made by A Ltd to Y would still be within the charge under CTA10/S455, because Y is an associate of a participator.

Example 2

If the facts outlined above were repeated, but Y was also the beneficiary of a trust which was one of the shareholders in A Ltd, then the company would be close. As the beneficiary of a trust, Y is a participator in his own right. This means that the shares possessed by the trustee, X and Z can be attributed to Y.

Any loan made by A Ltd to Y would be within the charge under CTA10/S455, because Y is a participator in his own right.