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HMRC internal manual

Company Taxation Manual

Close companies: capital payments to settlors: assessable as income

The most common capital payments to settlors by close companies are in the form of loans, or repayment of loans. But capital sum has a much wider scope.

A capital sum includes any sum paid otherwise than as income which is not paid for full consideration in money or money’s worth. The meaning of the word income in this expression is not limited to income that is taxable in the hands of the recipient. This means that the settlor’s current account or loan account with a close company, which is itself connected with the settlement, could be a source of such payments. These payments could be in the form of withdrawals which do not themselves constitute income and which cannot be franked by available unpaid remuneration accumulated in the account.

Unpaid remuneration is normally regarded as the first source of such withdrawals. However, much depends on the facts of each case.


Individual A has unpaid remuneration for earlier accounting periods. This has been held in their loan account for several years. In 2004 cash was introduced into the account and withdrawn in the current year - 2005. A could reasonably argue that the withdrawal was a repayment of the previous year’s loan and not the drawing down of unpaid remuneration for the earlier accounting periods.