In the intricate world of corporate finance, the provision of a loan by a close company to a shareholder, commonly referred to as a participator, comes with its own set of tax implications. Whether the shareholder is a director/employee or not, every loan transaction triggers a tax charge on the company, akin to a ‘penalty tax.’ In this blog post, we explore the implications for both the company and the shareholder, shedding light on the intricacies of this financial maneuver.
Implications for the Company
1. Tax Charge
When a close company extends a loan to a participator or an associate, it incurs a tax charge equivalent to 33.75% of the loan amount. This charge is due simultaneously with the corporation tax liability, payable either nine months and one day after the end of the chargeable accounting period or in instalments.
2. Calculation of Loan Amount
The tax charge is calculated based on the lower of the loan amount outstanding on the last day of the chargeable accounting period or the normal due date. Repayments made within nine months and one day of the period’s end are exempt from this tax charge.
3. Loan Repayment and Write-Off
If a loan to a participator is repaid, the company is eligible for a tax repayment in proportion to the repayment. If the loan is written off, the company can reclaim the tax paid initially. However, no corporation tax deduction is allowed for the written-off amount.
4. Exceptions
No tax charge is incurred if the loan meets three criteria:
- The loan amount is less than £15,000.
- The individual is a full-time working employee.
- The individual’s ownership of shares (including associates’ interests) is 5% or less.
Implications for the Shareholder
1. Immediate Tax Implications
There are no immediate tax implications for the individual upon receiving a loan from the company. However, consequences arise if the loan is written off.
2. Loan Write-Off
When a loan is written off, the individual becomes liable to income tax on the written-off amount, treated as a dividend received on the write-off date. Class 1 NIC is applicable if the individual is an employee.
3. Interest on Loans
If the company does not charge interest on the loan at the official rate of 2%, a taxable benefit arises. For employees, this is taxed as earnings, while non-employee individuals face taxation as a dividend distribution.
Understanding the tax intricacies surrounding loans to participators is crucial for both companies and shareholders. For more detailed information or personalised guidance tailored to your specific situation, feel free to contact us at TaxDigit. Our experts are here to navigate the complexities and ensure your financial strategies align with regulatory compliance.
