CTM61558 | Close companies: Loans to participators: liquidations and dissolutions: general

It is often the case in a close company liquidation or dissolution that there is an outstanding directors' loan balance. The company should normally have taken all possible steps to call in the loan before the liquidation or dissolution.

Where repayment and so forth takes place, or the loan is released or written off by the company, then any CTA10/S455 or S464A tax will be repaid to the company.

Once a company goes into liquidation, the shareholders are entitled to a proportionate share of the assets available in the winding up (they are owed that amount by the company). Those assets include the receivable represented by the overdrawn directors' loan account (which is an asset of the company).

The legislation makes plain that the distribution of the assets to the shareholders in a winding up is not a distribution within the meaning of CTA10/PART23 (CTA10/S1030). It is a transfer of assets and liabilities between the company and its members (see CTM36130) and is a capital distribution for the purposes of TCGA92/S122. So where there are net assets to be distributed, the shareholders are entitled to treat the value distributed to them as a capital gain and claim business assets disposal relief (was entrepreneurs' relief) as appropriate.

The treatment of any remaining overdrawn loan account on liquidation or dissolution will depend on whether or not the liquidation is a solvent or insolvent liquidation, whether or not there are net assets available for distribution after all creditors have been paid, and whether or not the loan is released or written off, see CTM61560.

However, in certain circumstances the company winding-up Targeted Anti-Avoidance Rule may apply to override the capital treatment of the distributions in a winding-up, see CTM36300 and the legislation at ITTOIA05/S396B and S404A.