Avoiding a loan charge without repaying in cash

Participators’ loan charges

As a director and participator in your company (broadly, someone who owns or controls 5% or more of its ordinary share capital) you might use its funds from time to time. If you owe it money at the end of its financial year which isn’t repaid within nine months, the company must pay a special tax (the “s.455” charge ) equal to 33.75% of the debt. Your company can reclaim the s.455 tax but it must wait until nine months after the end of the financial period in which the money you owe is repaid. It’s better to avoid the s.455 charge in the first place.

Clearing the debt and anti-avoidance

If you don’t have the cash available repaying the debt will be a problem. One option is for you to borrow more money from your company and use it to repay the old debt. This would seemingly clear the potential s.455 charge and create a fresh loan which won’t be liable because the nine-month deadline for repayment hasn’t been reached. HMRC calls this loan “bed and breakfasting” and has anti-avoidance rules to prevent it.

Anti-avoidance rule 1. If you repay £5,000 of what you owe and within 30 days you borrow £5,000 or more, some of the repayment won’t count towards reducing the s.455 charge.

Anti-avoidance rule 2. If you owed £15,000 or more, you repay some or all of it at any time (there’s no 30-day limitation) having previously arranged to borrow more money - in effect reimbursing you wholly or partly for what you repaid.

Example. Javid is a director shareholder of Acom Ltd. At the end of its financial year to 31 March 2022 Javid owes Acom £30,000. If any part of this remains owing after 31 December 2022 Acom must pay s.455 tax. On 1 October 2022 Acom pays a dividend of £20,000 into Javid’s bank. On 20 December Javid repays £16,000 to Acom to reduce the s.455 charge. On 1 March 2023 he borrows another £9,000 from Acom. He knew when he repaid the £16,000 that he was going to borrow more. The second anti-avoidance rule applies. The lesser of the repayment (£16,000) and the new borrowing (£9,000) is ignored and the s.455 charge applies to £23,000 (£30,000 - £16,000 + £9,000).

Cashless repayment avoids s.455

The anti-avoidance rules include a loophole which you can use to your advantage.

If instead of Acom paying the dividend into Javid’s bank it reduces the debt he owes wholly as a book entry, that is without transferring any cash, the anti-avoidance rules don’t apply. This might sound too good to be true but HMRC agrees.

The anti-avoidance rules wouldn’t bite even if Javid borrowed more from Acom after the dividend has been credited against his debt.