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Landlord Insider
On the Landlord Insider blog, you’ll find some excellent resources for landlords of all sizes. From the latest landlord news, to professional advice, tips and guides for landlords, there’s something for everyone. Brought to you by the excellent team behind the Landlord Vision property management software.

How Can a Close Company Save Money on their Tax Bill?

All of the companies featured in the case studies in this blog post are “close” companies.  

What is a Close Company? 

A “close” company is a company that is controlled by:  

  • Five or fewer “participators”, or  
  • Any number of “participators”, if those “participators” are also directors  

A “participator”, broadly, means a shareholder although loan creditors may, in some circumstances, also be participators. 

Case Study: Examples of Close Companies 

Example of ”close” companies include:  

  • The shares in Company A are owned equally by three individuals. Company A is a close company, because it is controlled by five or fewer participators. 
  • The shares in Company B are owned equally by nine individuals. Company B is a close company, because any five out of the nine could control it.  
  • The shares in company C are divided equally amongst five married couples. Company C is a close company, because when looking at “control” you include shares held by “associates” and spouses are associates of each other.  
  • The shares in company D are owned by ten directors who each hold 10% of the company’s shares. Even though it would generally require six of those directors to exercise control, the company is still close because they are all directors of the company as well.  

This is only a very broad summary of the rules defining a close company, because the detailed rules are extremely complicated, being designed to prevent people artificially creating a company which should be a close company but is not.  

For the purposes of this guide, assume that any property investment or property development company you set up is going to be a close company. 

Special Rules for Close Companies  

There are certain special rules for close companies, which cover:  

  • The meaning of a “distribution” from the close company.  
  • The tax on loans from the close company to its participators.  
  • The way corporation tax is calculated for certain types of close company. 

The Meaning of a “Distribution” From a Close Company  

If a close company provides any “benefits or facilities of whatever nature” to a participator (or his associates) in a close company, then this is treated as if the company had paid him a dividend equivalent to the benefit.  

This does not apply if the participator is also a director or employee of the company, where the benefit will be charged to Income Tax as part of his remuneration from the company. It is therefore quite unusual to come across this alternative dividend scenario: 

Case Study: Distribution to a Participator 

Closeco Ltd is a close company, and Daniel is one of the shareholders. Daniel is not a director and does not work for the company, and is not related to any of the other shareholders. The company manufactures TV sets, and one Christmas, it gives each of its shareholders a brand new plasma TV.  

Most of the shareholders are directors of the company and so they are taxed on the TVs as a benefit in kind from their employment, but Daniel is not, so he is treated as if he had received a dividend equivalent to the cost to the company of the TV.  

If the cost of the TV is £1,000, then Daniel (a higher rate taxpayer) will be charged to income tax of £325.  

The company is able to claim a deduction for the cost of the TVs supplied to the directors (as a cost of employing them), but it cannot get a deduction for the cost of Daniel’s TV. 

Loan To Participator – “s455 Tax”  

Much more common is a loan to a participator.  

This will occur if the company lends money to one of its shareholders. The company will be required to pay tax under section 455 CTA 2010 on the amount of the loan (hence the nickname “section 455 tax”). For loans made on or after 6 April 2016, the rate of tax is 32.5% of the amount of the loan (for many years before that date, the rate was 25%). 

When the loan is repaid, the tax will be refunded. The timing of this is important. 

Case Study: Section 455 Tax 

A close company makes a loan of £10,000 to a shareholder. When it puts in its Corporation Tax payment (nine months after its year-end), it must include section 455 tax of £3,250 in its tax payment – unless the loan is repaid within nine months of the end of that accounting period, in which case no section 455 tax is due. (If, for example, 60% of the loan is repaid in time, then only 40% of the original section 455 tax will actually be payable).  

Assuming the loan is not repaid within nine months of the end of the accounting period in which it was made, then the section 455 tax will be due in full and will only be repaid nine months after the end of the accounting period in which the loan is actually repaid. (The same approach applies to part-repayments made after the initial nine-month deadline).  

For example:  

The company prepares its accounts for the calendar year, and on 31 December 2019 it lends £10,000 to a shareholder. The loan is repaid on 1 January 2021 – just over 12 months later (but, importantly, in the second accounting period after the loan was actually made – the loan was outstanding for all of the accounting period ended 31 December 2020).  

On 1 October 2020, the company pays its Corporation Tax for the 2019 year, and section 455 tax of £3,250.  

On 1 October 2021, the company pays its Corporation Tax for the 2020 return year. It cannot yet claim back any section 455 tax, because although the loan has been repaid by now, it was repaid (just) after the end of the 2020 return year.  

On 1 October 2022, the company pays its Corporation Tax due for the 2021 year, and because it is now nine months after the end of the accounting period in which the loan was repaid, it can claim repayment of the section 455 tax. 

Although the loan was only outstanding for one year and two days at the most, the section 455 tax is not repaid until two years after it had to be paid.  

Some companies try to get around this by “bed and breakfasting” the loan:  

The company makes up its accounts to the calendar year. On 1 January 2020, it lends £40,000 to a shareholder.  

On 30 December 2020, the shareholder borrows £40,000 from her rich uncle, and repays the loan.  

On 2 January 2021, she again borrows £40,000 from the company, and repays her uncle.  

On 30 December 2021, she borrows £40,000 from uncle… and so on! 

Because the loan never appears in the company’s balance sheet at 31 December, the company believes there is no section 455 tax to pay – after all, the loan has been repaid, hasn’t it?  

HMRC take the view that a temporary repayment of a loan in this way is not effective – it is very unwise for a company to rely on “bed and breakfasting” a loan in this way.  

Legislation in CTA 2010 s 464 (as amended by FA 2013) specifically targets this practice of “bed and breakfasting” loans. Depending on the size of the loan, the repayment is ignored (so the section 455 tax remains due) if it takes place less than 30 days before a further loan is made (loans over £5,000), or if there are “arrangements” in place for a further loan, at the time of the repayment (loans over £15,000). HMRC may, however, allow as loan repayments those amounts made out of salary or dividend that have been credited to the participator’s loan account, rather than being paid out to him directly. 


In order to get the section 455 tax repaid, the company can also write off the loan. In other words, the company formally declares that it will cancel the loan. The tax consequences of this are:  

  • The company can claim repayment of the section 455 tax as if the loan had been repaid (or if the loan is written off within 9 months of the accounting period in which it was made, no section 455 tax will be payable in the first place).  
  • The shareholder is taxed as if he had received a dividend equal to the loan being written off.  

This can be used as a planning tool: 

Case Study: Write off of a Loan 

In Case Study 10, we saw the problems that can arise if a company pays dividends to its shareholders that are not proportionate to their shareholdings. If instead of paying a dividend to the shareholders, the company lent them money and then wrote off the loan, they would get the same tax effect as a dividend.  

The timing of the tax payment can be better, as well. Compare the timing of the tax payment between a dividend and a loan written off:  

The company makes up its accounts to the calendar year. Its Corporation Tax will therefore fall due for payment on 1 October, in the year following.  

In scenario A, it pays a dividend of £5,000 on 6 April 2021 to a shareholder, who pays Income Tax at the higher rate and has already used his new Dividend Allowance from other sources.  

In scenario B, it lends £5,000 to the same shareholder, also on 6 April 2021. It then writes the loan off on 6 April 2022 (i.e., less than 9 months after its year-end of 31 December 2022). 

In scenario A, the shareholder has received a dividend in the tax year 2021/22. He will be personally liable to pay Income Tax of £1,625 by 31 January 2022.  

In scenario B, the shareholder is deemed to have received a distribution (dividend) in the tax year 2021/22 (the tax year in which the loan was written off, not the tax in which the loan was originally made). He will be liable to pay the same amount of Income Tax (£1,625), but not until 31 January 2023.  

Because the loan was written off within 9 months of the end of the accounting year in which it was made, the company does not have to pay any section 455 tax. In both scenarios, the shareholder has had the use of the money from 6 April 2020, but the date on which he has to pay income tax on it has been deferred by a year. 


This particular planning technique is not as simple as it appears, and you should take advice from a Tax Adviser before using it. There are a number of aspects of company law to consider, and also the “preordained series of transactions” rules we have already looked at – see Case Study – 15. There may also be issues with NIC and taxable benefits in kind to deal with, if the shareholder is also a director. 

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