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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Close companies: capital payments to settlors: loans or repayment of a loan

Loans or repayments of loans are usually more easily identified than other capital sums. They may, however, be hidden in global entries for debtors or creditors in the balance sheet. This could largely depend on the degree of ‘formality’ of the loan, particularly where the founder or long-term managing director of a family company is involved.

The scope of the term ‘loan or repayment of a loan’ is not restricted and goes beyond formal arrangements with terms for interest and repayment.

The term ‘loan or repayment of a loan’ does not, however, necessarily include a debt that constitutes unpaid purchase money. For example, if a settlor sells an asset to his or her trustees or a connected company but leaves the purchase price uncollected until a later date, the settlor has not necessarily loaned the amount of that purchase price to the trustees (see Ramsden v CIR, 37TC619).

Once the existence of a loan is established, however, the concept of consideration is irrelevant. The words of ITTOIA/S634 (which define ‘capital sum’) apply that test only to capital sums other than loans or repayments of loans. ITTOIA/S633 therefore applies equally to a loan carrying interest at a very high rate as to an interest-free loan.

The term for repayment is also not relevant for the purposes of Section 633 which applies whether the loan is on call or for a period of many years. (See, however, CTM61090 as regards certain temporary loans.)