Bed and breakfasting loans to participators

Among the Finance Bill provisions on loans to participators is a measure aimed at countering the bed-and-breakfasting of loans to participators.  It’s effective from 20 March 2013.

Imagine you have an overdrawn loan account with your company and the deadline for repaying it or facing a charge under s455 (normally nine months after the year-end) is looming.  In the past you may have been tempted to repay the loan, claim the benefit of “repayment relief” under s458 and then, after a decent interval (or even an indecent one) draw down a fresh loan and re-start the s455 clock.  And hitherto such strategies were difficult for HMRC to challenge (assuming of course that that the loan was genuinely repaid, your cheque cleared and so on).

The Finance Bill makes two changes in this area.  Broadly speaking:

(1) If within a period of 30 days you both repay £5,000 or more and draw (in aggregate) £5,000 or more, you match the repayment to the drawing and to that extent you don’t get your s458 repayment relief; and

(2) If your overdrawn account exceeds £15,000, any repayment you make is matched with any drawing you make at any time (so as to deny you your s458 repayment relief) if and to the extent that the drawing was intended / envisaged / planned at the time of the repayment.  In some cases the intention will be obvious: but in many cases we foresee all kinds of difficulties in looking inside the participator’s mind to determine intent at the relevant time.  Uncertain legislation is bad legislation.

The legislation doesn’t apply in relation to “a repayment which gives rise to a charge to income tax”.  At first glance (and indeed at all subsequent glances) this makes no sense at all – how can a repayment of an overdrawn loan account with a company ever give rise to a charge to income tax on the person making the repayment?  But HMRC’s notes on the clause clarify what is intended “An example may be where a dividend is declared by the close company of an amount which is equal to the amount of the loan outstanding and upon which the participator is charged to tax”.   So it seems that what HMRC are trying to say is that to the extent that the loan is repaid out of taxable income generated specifically in order to repay the loan, the new rules don’t apply.  Thus clearing a loan account by voting a dividend (or, presumably, by remuneration or releasing the loan) will generate your repayment relief even if you then draw further amounts immediately afterwards.

For more on these and other changes to s455, contact David Whiscombe or your usual BKL contact.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


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