CLOSE COMPANY

Definition of a close company

A close company is a company controlled by:

any number of directors, or

five or fewer participators.

'Control' means holding > 50% of:

the issued share capital of the company, or the voting

power, or
the right to receive distributable profits, or
the right to receive the net assets in the event of a winding up.

A participator is primarily a shareholder

.
 To decide whether a group of individuals has control of the company it is necessary to include the
shares of their associates

 Associates are taken to be the spouse (or civil partner), children and issue, parents and remoter
ancestors, brothers and sisters and business partners.

 A company which is a subsidiary takes its status from the parent company.

 if the parent company of a group is a close company, the subsidiary is also a close company.

 If the parent company is not a close company, the subsidiary will not be close either, even
if it is a wholly-owned subsidiary.

The provision of benefits to shareholders

 The provision of a benefit to an individual who is an employee/director is subject to the

employment income provisions.
 the taxable benefit is calculated using employment income rules.

 The tax implications for the company and the individual shareholder of the provision of
a benefit to a shareholder.

 If it is a shareholder the benefit will be treated as dividend distribution and taxed at

7.5/32.5/38.1
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The provision of a loan to a shareholder, irrespective of employment status

For the company

There is a tax charge of 32.5% of the amount of the loan.

This charge is paid at the same time as the corporation tax liability (i.e. either nine
months and one day after the end of the accounting period or the charge is built into the
company's quarterly instalment payments).
No tax is payable if the loan has been repaid before nine months and one day after the
end of the accounting period.
Where the tax charge has been paid, it becomes repayable when:

the loan is repaid:

 where part of the loan is repaid the same proportion of the tax is repayable
loan is written off:

the company can reclaim the tax paid when the loan was made
there is no deduction for the write-off against the company's profits for CT purposes
at this point the individual becomes liable for income tax (see below).

No tax is payable by the company where the loan fulfils three requirements:

 The amount of the loan is less than or equal to £15,000, and

 The individual is a full-time working employee, and

 The individual (including associates' interests) owns 5% of the shares or less.

For the shareholder

There are no immediate tax implications for the individual when the company makes
them a loan.

If the loan is written off, he/she will then become subject to income tax on the amount
written off as though it was a dividend received at the date of the write-off.
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Interest

Where the company does not charge interest of at least the official rate (currently 2.25%),
there will be a taxable benefit. The rules for the provision of benefits apply (see above).

For an employee, this benefit will be taxed as earnings.

 Where the individual is not an employee, the benefit will be treated as a dividend

distribution

The provision of loans from shareholders to the close company

A shareholder may take out a personal loan in order to make a loan to or buy shares in a
close company.
Income tax relief on interest paid on such borrowing is available as a relief deducted from total
income, provided the company is not a close investment company

The conditions are that the individual:

has a material interest (more than 5%) in the company, or

is a full-time working officer or employee involved in the management of the company.

Close investment holding company (CIC)

All close companies are close investment companies (CIC) unless their main activity is trading,
or letting property to unconnected persons.
The tax consequences of a CIC are as follows:
The shares will not be treated as business assets for IHT nor CGT.
Tax relief will not be available to an individual if he/she borrows money to invest in a CIC.

Extracting profits from a company

charging rent
charging interest, and
funding a pension scheme.

Withdrawing investment from a company

 Purchase of on shares by company back

 If certain conditions met capital distribution, if not dividend distribution and charged IT
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 Sale of shares

 Liquidation

 before the liquidator is appointed they are taxed as dividends

 after the liquidator is appointed they are treated as capital receipts for the
disposal of the shares

 winding up

 If the payment is more than £25,000, the whole amount will be treated as a
distribution