You have an overdrawn loan account with the subsidiary of your main company. What are the tax consequences of this if the company is wound up?

S.455 charge

Before we can tackle the question there are one or two others which need to be answered first. For a start, whether her overdrawn loan account is subject to the special tax, known as the s.455 charge. This applies to loans made by “close companies” to the ”participators”, often referred to as a director’s loan.

Close company. Broadly, a close company is one that’s resident in the UK and is controlled by five or fewer individuals.

Participator. Shareholders and others who control the company’s share capital are participators. For the purposes of the s.455 charge a participator of a company also counts as a participator of a subsidiary. For example, if Bob owns all the shares in Acom Ltd and it owns all the shares in Bcom Ltd, Bob is a participator of both companies.

You own all the shares in the parent company of the subsidiary the companies are “close” and you’re a participator in each. Therefore, the s.455 rules apply to the money you owe to the subsidiary.

The main question

Now that we’ve established that the s.455 rules apply to your overdrawnloan account with the subsidiary, we can look at the tax consequences of this if the company is wound up with the money still owing.

S.455 deadline. The s.455 tax, which is payable by the company, is equal to 32.5% of the amount borrowed by the participator that’s still owing after nine months following the end of the company’s accounting period in which the borrowing occurred.

Insolvent company. If the company is insolvent you will be required by the liquidator to repay some or all of what you owe to go towards paying off the company’s creditors. As you will no longer owe the company money there will be no s.455 charge.

Solvent company. Because the subsidiary company in this case is solvent, just about, what happens when the company is liquidated can have an effect on the s.455 tax.

Debt not cleared

It might seem that there’s little point in you paying off the £20,000 to clear her overdrawn loan account as the money would go to the parent company, which you own entirely. Ultimately, therefore, the money you repay will end up back in your pocket.

Trap. If you don’t clear your debt to the subsidiary an anti-avoidance rule treats the loan as having been written off. This counts as a distribution taxable as a dividend and potentially liable to Class 1 NI.

Tip. The tax and potential NI charges are easily avoided by the subsidiary transferring the debt to the parent company before the wind up commences. The s.455 charge will still apply if the £20,000 owed hasn’t been repaid by the nine-month deadline, but will be refunded by HMRC if and when it is.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.