CTM61670 - Close companies: loans to participators: indirect loans

ICTA88/S419 (5)

Section 419 (5) catches some loan arrangements, where the loan is not made directly to an individual participator in the company (or an associate of a participator), it applies where:

• a close company makes a loan or advance which does not otherwise give rise to any charge under ICTA88/S419 (1),
• some person other than the close company makes a payment or transfers property to or releases or satisfies (wholly or partly) a liability of an individual who is a participator or an associate of a participator,

and

• any person has made arrangements covering the loan and the payment, transfer, release etc.

Example 1

Company D is a close company. Instead of making a loan directly to D, an individual participator, it makes it to an associated company, Company E. Company E then passes the loan to D. The loan by one company to the other is treated as if it had been made direct to D.

Example 2

Company T, a close company, makes a loan to A. A is an individual participator in Company W but not in Company T. Company W, acting in concert with Company T, then makes a loan to D, an individual participator in Company T. Company T and Company W have swapped loans to participators and are treated as if they had made loans to their own participators.

Consider whether Section 419 (5) could be applied to loans to partnerships that are not otherwise caught and see CTM61515. It should also be considered in management buy out situations and for loans to employee share schemes/employee benefit trusts etc where Section 419 (1) does not apply (see CTM61525).

When ICTA88/S419 (5) applies, the close company should be assessed in the usual way and CTM61605 onwards apply.

ICTA88/S419 (5) is subject to CTM61680, and does not apply where any person makes these arrangements in the ordinary course of their business.