Close Companies

What is a Close Company?

A company controlled by:

  • Any number of directors, or
  • five or fewer participators.

Control means holding more than 50% of the issued share capital of the company.

A participator is a shareholder but it’s necessary to also include the shares of associates. For example, associates of a particular shareholder will include: spouse, children, parents, remote ancestors, brothers, sisters and business partners.

What are the implications of being a Close Company?

Close Companies some shareholders may have significant influence over how a company is run and how resources are used. To avoid these shareholders benefitting unfairly over other minority shareholders, there are anti-avoidance measures that HMRC has introduced. The main two measures cover:

  • Provision of benefits to shareholders, and
  • Provision of loans to or from shareholders.

Provision of Benefits to Shareholders

If the benefit is provided to an employee/director of the company then Employment Income Provisions apply. This is straightforward since the cost of providing the benefit will be an allowable expense for the company and for the individual the benefit is taxed under employment income rules.

However, if a benefit is provided by a CLOSE COMPANY to a SHAREHOLDER who is not an EMPLOYEE then different rules apply.

Under these circumstances, a DIVIDEND is deemed to have been paid by the company. The disadvantage is that the DIVIDEND is NOT an allowable expense for the company.

For the individual shareholder the benefit received is treated as a DIVIDEND. The first £2,000 of dividend income is taxed at 0% the rest at the individual’s basic rate, additional rate or higher rate tax band, as applicable to their circumstance.

Provision of a Loan to a Shareholder

The provision of a loan to a shareholder, irrespective of employment status, has the following implications:

The company has a tax charge of 32.5% of the amount of the loan.

This tax charge is repaid to the company when the loan is repaid (and partially repaid if the loan is partially repaid).


NO TAX CHARGE is payable where the loan fulfils ALL THREE of the following:

  • The loan is less than £15,000, AND
  • The individual is a FULL TIME EMPLOYEE, AND
  • The individual owns LESS THAN 5% of the outstanding share capital.

Provision of Loans from Shareholders to a Close Company

If a shareholder takes out a personal loan to make a loan to a CLOSE COMPANY, tax relief on the INTEREST PAID is available as a deduction from TOTAL INCOME.

The individual must either be a FULL TIME EMPLOYEE / DIRECTOR OR own more than 5% of the company.