CTM61540 - Close companies: loans to participators: exclusion of certain loans
ICTA88/S420 (2), (2)(c)
Where a close company makes a loan or advance (after 5 April 1990) for any purpose to a director or employee of the close company or of any associated company, (see CTM60210) that loan or advance is not within ICTA88/S419 if all the following conditions are satisfied:
- The amount of the loan in question plus the outstanding amounts of loans made to the borrower does not exceed £15,000.
- The borrower works full time for the close company or any of its associated companies.
- The borrower does not have a material interest (see CTM61560) in the close company or any of its associated companies.
When deciding whether the limit of an individual employee has been reached, do not take loans to the spouse into account.
Where both husband and wife are directors or employees, they will each be entitled to a separate limit of £15,000.
Slightly different rules applied to loans made before 5 April 1990. Should you need details, these can be obtained from CTIAA (Technical).
Borrowers that acquire a material interest
Where a loan made to a borrower remains wholly or partly outstanding when that borrower acquires a material interest or an existing interest is enlarged and becomes material (see CTM61560), the loan will not then be within the protection of ICTA88/S420 (2).
You treat the company as if it had made a loan equal to the amount outstanding at the time the material interest is acquired, and tax should be assessed on the company in accordance with CTM61790.
Full time
A director or employee should be regarded as working full-time for a close company or any of its associated companies if he or she works for the close company and/or its associated companies not less than three-quarters of the normal working hours of the close company.
Special arrangements
A loan that is part of an arrangement which results in payments being made or property transferred to, or liabilities released or satisfied for a participator or associate of a participator is deemed under ICTA88/S419 (5) (CTM61670 to CTM61680) to have been made to that participator, etc, for the purpose of ICTA88/S419 (1).
For example, a close company makes a loan to an employee who is not a participator. That employee then uses the loan to buy shares from an existing shareholder. The result is a ‘loan’ from the company to a participator.
The loan, however, may be exempted if the deemed borrower (that is, the existing shareholder in the company) can show that the deemed loan satisfies ICTA88/S420 (2).
