CTM61630 - Close companies: loans to participators: release or writing-off of loan or advance

ICTA88/S421

A loan or advance, which is assessable under Section 419 ( CTM61505), may be wholly or partly released or written off. From 6 April 1999 the company will get relief under ICTA88/S419 (4). ICTA88/S421 will then apply, and the person to whom the loan etc. was made will have the amount released or written off included in his or her total income. This amount is treated as net income received after deduction of tax at the Schedule F ordinary rate. This notional tax is not repayable (see AP3088).

As long as the company was a close company at the time making the loan etc, this treatment is followed even if the company is not a close company when the loan etc is released or written off.

Where the participator or associate is also an employee (or a relative of an employee), the charge under Section 421 has priority over the charge on the employee under ICTA88/S160 (SE21747 to SE21748). Any amount chargeable under Section 421 is not also charged as income from employment.

When you find that a loan to which Section 419 applied has been wholly or partly written off or released, make a report to the tax office of the person to whom the loan etc was made. This report should:

• refer to ICTA88/S421 and to this paragraph,
• give the full name and address (and the tax reference, if known) of the person to whom the loan etc was made,
• give the date the loan etc was released or written off and the amount released or written off,
• give the name of the company that made the loan or advance,

Where the participator or associate is an employee, the amount released or written off will attract Class 1 NIC if it is remuneration or profit derived from an employment (Section 3 (1) SSCBA 1992). You should therefore notify the company's Employer Compliance Unit of the amount released or written off, the date of the release or write off and the full name and address of the employee to whom the loan etc. was made.

• For the treatment on the death of the individual to whom the loan was made see CTM61640.
• For the treatment on the termination of a trust see CTM61650.
• For sums paid into settlement see ICTA88/S677; this treatment is not followed if Section 677 applies to the loan.