Budget 2016: Changes in rate of tax for loans to participators

Loans/advances to participators (shareholders) and associates of participators in close companies that remain unpaid nine months after the year end give rise to a charge on the company under CTA 2010, s 455. The charge is currently levied at 25%.

With the increase in dividend rates due to take effect from 6 April 2016, the government is concerned that this will lead to an increase in company loans aimed at avoiding the higher dividend rates. To address this, legislation will be introduced to link the s 455 charge to the dividend upper rate. This will mean an increase in the rates from 25% to 32.5% for all relevant loans made or benefits conferred by close companies on or after 6 April 2016.

Given the increase in dividends effective from 6 April 2016, this measure is not surprising. There may however still be some benefit for those paying 38.1% on dividends after 6 April 2016, to consider a company loan instead.