CTM61604 - Close companies: loans to participators and arrangements conferring benefit on participators: repayment of - transfers of assets

Equally in many cases, repayment is said to be effected by the transfer of an asset from the debtor/participator to the company. In such cases, the market value of the asset at the time of transfer should be established, if necessary, with the help of valuation colleagues. Only the market value of the asset transferred to the company will constitute a repayment.

Example

Shareholder has an overdrawn DLA in his company (Y) amounting to £1.75m at the end of the AP to 31 March 2020.

If this is not repaid by 31 December 2020, the company will incur a S455 tax charge of £568,750 (£[email protected]%).

The shareholder holds shares in a separate company, Z, which he transfers into the ownership of company Y. He claims that the shares in Z are worth £2m. The transfer is effected by crediting the £2m to his overdrawn loan account in Y on 26 September 2020.

Clearly this will clear the overdrawn loan account, leaving him a further £250,000 on which he is free to draw, untaxed, and the company will not face a S455 charge.

However, on challenge, the market value of the asset is agreed to be only £25,000. The loan account should be rewritten to remove the original credit of £1.75m and replace it with £25,000. The loan account will therefore be overdrawn by £1.5m 9 months after the end of the AP and a S455 charge of £487,500 will arise.

This will also have knock on effects for the DLA for the later periods.