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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Close companies: tests: rights in a winding-up

CTA2010/S439 (1), (3) and 5; S440 (2) and (3); S441; S442; S443; S444 (formerlyICTA88/S414 (2) - (2D))

The tests so far considered in determining whether a company is a close company have depended on the question of control. With effect from 1 April 1989 there is a further test, in which control is irrelevant, based on rights in a winding-up. It is in CTA2010/S449 to S444 and provides that a company (‘the relevant company’) is close if five or fewer participators, or participators who are directors, together possess or are entitled to acquire such rights as would, in the event of the winding-up of the company, entitle them to receive the greater part of the company’s assets then available for distribution among the participators. By reason of CTA2010/S451 (4) to (6) (formerly ICTA88/S416 (6)) there is attributed to any participator all the rights of his associates.

This test is applied first on the basis that loan creditors are included as participators and then on the basis that they are disregarded. The company is close if it satisfies the test on either basis.

Looking through

If in the course of the deemed winding-up of the relevant company assets would be received by a participator which is a company, we proceed on the basis that the corporate participator is itself wound-up and that the assets it received from the winding-up of the relevant company are distributed to its own participators in proportion to their respective entitlement to the assets of that corporate participator. If in the course of that deemed winding-up assets would be received by a further company the process is repeated. The process continues to be repeated until all of the assets of the relevant company are distributed to individuals (with the exception referred to below). The effect is that we ‘look through’ all participators which are companies.

The exception to this looking through is any company whose rights are possessed purely in a fiduciary or representative capacity. These stand with the individual participators in determining whether five or fewer participators would be entitled to receive the greater part of the assets available for distribution.

For the purposes of this test, then, the assets of the relevant company which would be distributed to any participator are the sum of what he would receive directly from the winding-up of that company plus what he would receive indirectly through the winding-up of participators which are companies.

For the purposes of this provision a person is treated as a participator in the relevant company if he is a participator in any company itself entitled to receive assets, directly or indirectly, in the winding-up of the relevant company.