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HMRC internal manual

Company Taxation Manual

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Close companies: loans to participators and arrangements conferring benefit on participator: partnerships

Where a close company makes a loan or advance to a partnership (including an LLP) in which all of the partners/members are relevant persons and at least one of the partners/members is a participator in the company, then the other partners/members are likely to be associates of a participator (see CTM60150). The loan is therefore to relevant persons and the loan or advance is within CTA10/S455.

For loans made before 20 March 2013, there were difficulties in applying CTA10/S455 to:

  • loans to Scottish partnerships (other than Scottish LLPs) as they had a separate legal identity from the persons carrying on the partnership (though Section 459 could apply where the monies ended up in the hands of the participator) and
  • loans to partnerships which had a company partner/member (as the loan was not to individuals)

Some people queried whether a previous version of the guidance suggested that the charge did not apply where a loan to a partnership was a ‘bona fide’ loan. This has never been the case and was explicit in the sub-heading of the previous guidance which referred to the specific structure involving a partnership with a company partner. If there was a genuine partnership with the appropriate legal documentation/agreements etc, then prior to 20 March 2013, any loan to that partnership (with a company partner) was not chargeable (as in the second bullet above).

However, there is no commercial purpose test in Section 455 for loans to partnerships or otherwise. If there is a loan or advance within the wording of the legislation then it is chargeable by the provision, irrespective of its purpose (subject to the normal exceptions - see CTM61530 and CTM61535).

Various difficulties in applying the legislation to loans to partnerships were addressed by the FA13 changes and CTA10/S455 (1) (c). The new legislation applies to a loan or advance made on or after 20 March 2013 to any partnership (including LLPs) in which at least one of the partners/members is an individual:

  • who is a participator in the company making the loan, or
  • who is an associate of an individual who is a participator in the company making the loan

It is not now material if there is also a company partner, thus a CTA10/S455 charge can no longer be avoided by simply inserting a company partner/member.

The charge is on the whole amount of the loan; it is not apportioned to take account of any partners/members who may not be participators, or who are not individuals.

See CTM61655 for details of how to apply ITTOIA2005/S415 where a loan to a partnership which includes a company partner is released or written off.

Limited liability partnerships (pre 20 March 2013)

For loans made before 20 March 2013 to an English or Scottish LLP it is often argued that the loan cannot be charged by Section 455. This argument should not generally be accepted.

CTA09/S1273 makes it clear that limited liability partnerships (both English and Scottish) are treated as transparent for tax purposes, in much the same way as an English partnership has always been. Thus a loan to an LLP is treated as being a loan made to the partners/members (CTA09/S1273 (1) (b)).

Therefore, provided that at least one of the partners/members of the LLP is a relevant person who is a participator (either in his own right or via the partnership) in the close company, and there are no corporate members (pre 20 March 2013), then any loans/advances/indebtedness will be chargeable.

Limited liability partnerships (from 20 March 2013)

For loans made on or after 20 March 2013, the fact that such loans are chargeable is now made explicit by the legislation; equally loans to LLPs will be chargeable regardless of whether one or more of the partners/members is a company.

Other arrangements

It is common to see other arrangements between close companies and partnerships which purport to escape the S455 charge, for example where capital contributions rather than loans are made to partnerships and/or where the company is a partner in the partnership, and its profit share is not withdrawn from the partnership. In both these cases the individuals, who are partners (and also participators in the company), may draw on the funds.

There has been no change to the meanings of ‘loan’, ‘advance’ or debt. HMRC accept that, on the facts in most cases, capital contributions and undrawn partnership profits do not amount to loans or advances within the meaning of the legislation.

A new charging provision has been inserted in the legislation at CTA10/S464A, (see CTM61570) for detail to ensure that such arrangements can be caught. Broadly, it will apply to arrangements involving close companies and partnerships where value is leaving a company and being ‘paid’ to a partnership in a form that, on the facts, falls short of the definition of a loan or advance but where the value ends up in the hands of a participator (or associate) who is also a partner in the partnership.