Budget 2013: Loan to Participators (Overdrawn Directors Accounts) – s.455 Tax Charge

Budget 2013 announced various anti avoidance measures aimed at the loan to participators/overdrawn directors accounts s.455 tax charge .

Repayment Provisions Amended To Deny “Bed & Breakfasting”

Certain owner managed companies have previously been extracting funds from the company through overdrawn directors loan accounts, which are then repaid by crediting the loan account just before the date when tax would become due under s.455. They would then subsequently recreate a similar debt to the company. Such tactics are now being targeted by HMRC as previously there were no specific rules to prevent it.

The repayment provisions are to be amended so as to deny relief for the loan to participators s.455 tax charge where repayments and re-drawings are made within a short period of time of each other, or there are arrangements (or an intention) to make further chargeable payments at the time repayment is made (and there are subsequent re-drawings).

The effect of this being that the loan to participators s.455 tax charge can no longer be avoided by repaying the loan within 9 months of the accounting period end if a loan is taken out again soon after or there is an intention to do so.  Therefore such ‘bed and breakfasting’ is no longer a possibility.

Loans via Relevant Partnerships & LLPs

Legislation will be introduced in Finance Bill 2013 to apply the loan to participators s.455 tax charge to any loans from close companies to participators made via partnerships (including LLPs) in which the close company and at least one partner/member is a participator (or associate of).

Extractions of Value

Where there is an extraction of value from a close company and the value is transferred to a participator, there will be a 25% tax charge on the close company on the amount of the payment to the participator.

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