Close company loan to a shareholder-director
Ashby Consulting Ltd is a close company owned equally by two brothers, Tom and Sam, who are both directors. In October 2024 the company lent Tom £30,000 interest-free to help with a house deposit. The loan is repayable on demand and is not a loan in the ordinary course of business (the company is a consultancy). Tom repays £10,000 in March 2025. The company's year end is 31 March. Corporation tax is paid at the small profits rate. Tom is a higher-rate taxpayer with salary of £60,000. Sam is concerned that the loan benefits Tom at the company's expense and asks what the tax consequences are. The company has not previously made any loans to participators.
1. Explain the corporation tax consequence of the loan and calculate the amount payable and its due date.
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A loan to a participator of a close company (Tom is a shareholder and director, so a participator) that is not repaid within nine months of the end of the accounting period triggers a section 455 charge - a tax charge on the company at 33.75% of the outstanding loan.
Calculation. The loan was £30,000. Tom repaid £10,000 in March 2025, before the year end of 31 March 2025. The amount outstanding at the end of the accounting period is therefore £20,000.
Section 455 charge: £20,000 × 33.75% = £6,750.
Due date. The charge is due nine months and one day after the end of the accounting period, i.e. by 1 January 2026. It is paid with the corporation tax return (CT600A) and is not a corporation tax on profits - it is a separate charge, refundable when the loan is repaid.
Key trap. The charge is calculated on the balance outstanding at the end of the accounting period, not the original loan. Tom's March repayment reduces the charge from £10,125 to £6,750. Had he repaid the whole £30,000 before 31 March 2025, no charge would arise at all.
2. Explain the income tax consequence for Tom and whether the interest-free element creates a taxable benefit.
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Benefit in kind. An interest-free loan to a director is a beneficial loan for employment income purposes if the total of all such loans exceeds £10,000. Tom's loan is £30,000, so the £10,000 exemption does not apply (and the balance remains above £10,000 even after the £10,000 repayment).
The taxable benefit is the official rate of interest on the loan, less any interest actually paid. The official rate is set by HMRC (currently 2.25% for 2024/25; the candidate should use the rate in force). Benefit = £30,000 × 2.25% for the period the loan was outstanding, apportioned for the months. Tom pays no interest, so the full notional interest is taxable.
As a higher-rate taxpayer, Tom pays 40% on the benefit. The company must report the benefit on form P11D by 6 July following the tax year, and Tom's PAYE code is adjusted (or he reports it on his return).
Interaction. The benefit is taxed on Tom as employment income, and the company may also face Class 1A NIC at 13.8% on the benefit. The candidate should note that the £10,000 threshold is tested on the aggregate of all beneficial loans, not each loan separately.
3. Sam objects that the loan is unfair to him. Advise on the practical steps that would mitigate the tax cost and the governance issue.
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Tax mitigation.
- Repay the loan before the nine-month deadline (by 1 January 2026) to trigger a refund of the £6,750 section 455 charge. The charge is a cash-flow cost, not a permanent one, provided repayment occurs.
- Charge interest at the official rate - this removes the beneficial loan benefit for Tom, though it creates interest income for the company (taxable) and Tom may get relief if the loan is used for a qualifying purpose (a house deposit is not, so no relief).
- Consider a formal dividend instead - if the company has distributable profits, paying Tom a dividend of £30,000 avoids the loan charge and the benefit-in-kind, though it is taxable on Tom as dividend income at 33.75% (higher rate) and must be proportionate to shareholdings unless a valid arrangement exists.
Governance. Sam should ensure the loan is documented (board minutes, loan agreement, repayment terms) and that the transaction is disclosed in the company's accounts as a loan to a director. A director-related-party loan without documentation is a red flag on review. Because Tom and Sam are equal shareholders, a loan to one brother is effectively funded 50% by the other; Sam should insist on either a matching loan or interest, and record the decision. The examiner rewards recognising that the tax answer and the governance answer point in the same direction: document, and repay early.