Close company loan write offs

Close companies, generally meaning family and owner managed companies, are subject to special rules in relation to loans or advances made to participators and their associates.

Participators primarily means shareholders. Where such loans are written off or released an equivalent amount is treated as a deemed net dividend for income tax purposes. This aspect remains unchanged but the position of the company for corporation tax is to be altered. Under the corporation tax rules governing corporate debt (the ‘loan relationships’ rules) the company may be entitled to a deduction against its tax liability. A loan released or written off will normally give rise to an expense recognised in the company’s accounts. The release or write off of loans to participators will not obtain a corporation tax deduction when made on or after Budget day. HMRC is seeking to clarify the law so that there is no tax advantage to a shareholder/ director receiving a loan from a company which then claims a corporation tax deduction compared to the shareholder/director receiving a dividend (for which there is no corporation tax deduction for the company). Please do get in touch if you would like further advice in this area.