Sidestepping the snares: tax charge on loans to (non) participators

Most company owners are aware that a special standalone charge to tax may be payable if a ‘close company’ (very broadly, a private or family company) makes a loan to a ‘participator’ (broadly, a shareholder) or an associate of a shareholder.  Where the charge applies, the company is required to deposit with HMRC an amount equal to 32.5% of the amount loaned.  The deposit is repaid only if the loan is repaid (though there will be a delay of up to 21 months between repayment of the loan and repayment of the deposit).

It’s bad enough that the charge applies (completely illogically) even if the ‘participator’ is also an employee or director and is paying tax on the full benefit of the loan.  But what’s worse is that the charge is extended to apply to some circumstances where it has no business poking its nose in at all.

The situation to look out for is where a close company makes a loan (to anyone, including to another company) pursuant to an arrangement whereby the money finds its way to a participator (or an associate of a participator) in it.  You can rest easy if the loan is made ‘in the ordinary course of a business carried on’ by the person making the arrangement, or if what the participator (or associate) receives is subject to income tax: otherwise, the 32.5% tax charge applies.  Conspicuously, there is no ‘motive test’: if the specified conditions exist, the charge applies regardless of the presence or absence of any tax avoidance purpose.

Two simple examples:

Company A and Company B are both controlled by Mr C.  Company A loans cash to Company B to:

  • allow it to repay an old debt owed to Mr C; or
  • allow it to purchase from Mr C’s brother (at full market value) an investment property.

In each case the tax charge will apply despite the complete absence of anything remotely resembling tax avoidance.

If the problem is recognised in advance there may, depending on the circumstances, be a number of ways of legitimately rearranging matters so as to avoid it. But only if the problem is recognised: it’s in the nature of bear-traps that extrication is often more difficult than sidestepping.

For more information, please get in touch with your usual BKL contact or use our enquiry form.

This article was republished in TAXline (November 2020) and is available on the ICAEW website to ICAEW members.



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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