Loans to directors, trusts and LLPs

Anti-avoidance legislation aimed at loans to directors to be extended

Loans to directors of close companies have been the subject of anti-avoidance legislation for many years. The legislation in its present form applies to loans to participators in close companies. It is now to be extended, by Schedule 28 Finance Bill 2013, to loans to a partnership, to trustees of a settlement and to corporate members of an LLP.

Section 455 Corporation Tax Act 2010 applies where … ‘a close company makes a loan or advances money to a relevant person who is a participator in the company or an associate of such a participator’. A relevant person is an individual or a company acting in a fiduciary or representative capacity. A close company is a company that is controlled by five or fewer participators, or by any number of directors. The term ‘participator’ includes associates.

The Finance Bill 2013 goes further; it substitutes:

“In section 455 (charge to tax in case of a loan to a participator), for subsection (1) substitute:

(1) This section applies if a close company makes a loan or advances money to:

(a) A relevant person who is a participator in the company or an associate of the participator;

(b) The trustees of a settlement one or more of the trustees or actual beneficiaries of which is a participator in the company or an associate of such a participator; or

(c) A limited liability partnership or other partnership one or more of the partners in which is an individual who is:

(i) A participator in the company; or

(ii) An associate of an individual who is such a participator.”

(2) The amendment made by this paragraph has effect in relation to a loan or advance made on or after 20 March 2013.”

‘Relevant persons’ have previously been limited to individuals and companies acting in a fiduciary or representative capacity, but the new provisions go further than this. They apply to loans made by a close company to trustees of settlements where any actual or potential beneficiaries are either participators or associates of participators. This seems likely to have further implications for close companies sponsoring employee benefit trusts, and may discourage employee share ownership.

Potential beneficiaries may also struggle as they would be treated as participators, even though they may have received no distributions and may not even know how the trust is invested.

Similarly worrying is the extension to LLPs or ordinary partnerships where one of the members is a participator or associate of a close company, which makes a loan to the entity. Would the associate have any knowledge of the loan, and how would the loan be apportioned? Assuming the participators could be identified, would it be possible to identify the associates?

Schedule 28 also refers to a charge on arrangements conferring a benefit upon a participator:

“(1) This section applies if:

(a) A close company is at any time a party to tax avoidance arrangements, and

(b) As a result of those arrangements, a benefit is conferred (whether directly or indirectly) on an individual who is:

(i) A participator in the company, or

(ii) An associate of such a participator…”

It is the missing word that could cause problems, for example the absence of the word ‘artificial’ before arrangements. It is unclear what an arrangement is, or indeed, what a benefit would have to be, to come within this legislation. Would it include share options?