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Loans to participators
What are the loans to participators rules?
Family-owned and private equity backed companies are often controlled by five or fewer shareholders and are therefore ‘close’ for tax purposes. One of the consequences of being a close company is that a 25% tax charge will arise in the company when loans made to shareholders are still outstanding nine months after the year end. These are the so-called 'loans to participators' rules.
The rules were broadened significantly in March 2013 to tackle perceived anti-avoidance and will now catch a variety of transactions with, and payments to, shareholders which were not within the rules.
In addition, the Government has announced that it will be undertaking a wider review of the loans to participators regime to understand whether any more fundamental changes should be made to the regime.
What changes were introduced from March 2013?
The following three types of transaction are now caught within the extended loans to participators rules:
Loans made to participators via an intermediary (for example, partnerships or trusts).
Arrangements which result in any untaxed extractions of value from close companies ending up in the hands of a participator. For example, where the company’s funds enable an individual to overdraw a partner’s loan account in a partnership.
Changes to the loans to participators rules, which are designed to deter ‘close’ companies from transferring value from the company to shareholders in ways which are not chargeable to income tax as remuneration or dividends, mean that the rules will now apply to a much wider range of transactions between companies and their shareholders. Companies should review whether they are ‘close’ and, if so, whether the new rules will affect them in order to ensure that they do not unwittingly crystallise any tax charges for the company.
'Bed and breakfasting' – whereby a loan is repaid prior to the point when the tax charge would have arisen, only for the close company to make another loan to the participator shortly afterwards. This will apply if the new loan is made within 30 days of the loan being repaid or if there is an intention or arrangements for a new loan to be made at the time the initial loan is repaid.
What is proposed in the consultation document? On 9 July 2013, the Government published a consultation document on the taxation of loans to participators of close companies.
The consultation document sets out four possible options in relation to the regime:
Maintain the current regime.
Increase the tax rate from 25% but no other changes.
Replace the current regime with a lower (suggested 5%) but permanent charge that arises annually based on the loan balance outstanding at the year end and not repaid within nine months of the year end.
Replace the current regime with a lower (suggested 5%) but permanent charge that arises annually based on the average loan balance outstanding during the year, regardless of whether the loan is repaid within nine months of the year end.
The period of consultation closes in October 2013, after which, the Government will announce any changes to the legislation.
kpmg.co.uk
Private Client Update
September 2013
Who will this affect? This will affect companies who are 'close' for tax purposes and who make loans or transfer value to participators in a way that is not subject to income tax as remuneration or dividends.
In many circumstances, if a company’s shares are partly held via partnerships (for example, private equity investments) it is often difficult to prove that the company is not close and so the rules (and the rule changes) will be relevant to those companies.
How can KPMG help? KPMG can assist companies in reviewing whether they are close and, if so, whether the new rules will affect their transactions with shareholders in order to ensure that they do not unwittingly crystallise any tax charges for the company.
Example Mr Smith, an individual, owns the entire share capital of S Limited, which draws up accounts to 31 March each year.
During the year ended 31 March 2013, Mr C’s director’s loan account became overdrawn by £20,000. He arranged to repay the full £20,000 on 28 March 2013.
However, on 3 April 2013, he borrowed the same amount from the company, restoring the £20,000 overdrawn balance of his director’s loan account.
Under the previous rules, since there was no outstanding loan balance at the year end, no loans to participators charge would have arisen.
The new rules provide that there will be no relief from the loans to participator charge since the new loan is made within 30 days of the repayment of the old loan.
The loans to participators charge could have been avoided by the company declaring a dividend of £20,000 to ‘clear’ Mr C’s director’s loan account. Clearly, this course of action would result in the individual being subject to tax on the dividend receipt.
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