CTM61560 | Close companies: loans to participators: Insolvent liquidations and dissolutions

Once the liquidation starts, it is open to the administrator or the liquidator to seek repayment of any loans or, if repayment is not made, to release or write off any outstanding loan. Section 458 relief will be due to the company and any Section 455 tax repaid or discharged.

In accordance with their statutory functions, liquidators should be encouraged to release or write off any irrecoverable balances in appropriate cases.

Where the whole or part of such a loan is released or written off then there would be a charge under ITTOIA05/S415 on the person to whom the loan was made CTM61655 and Class 1 NIC will be chargeable, CTM61660.

Example 1

Director loan account £1m overdrawn at date of liquidation

Balance of company assets (i.e. net of creditors but including the DLA), £500k

The shareholder will be due a distribution, chargeable to capital gains tax in the amount of £500k (the net assets). The distribution will repay £500k of the overdrawn loan account (by set off) as in the example above, and relief under section 458 will be due to the company on that amount. However that still leaves the shareholder owing £500k.

Where the liquidator releases or writes off the balance, it would be chargeable on the shareholder under ITTOIA05/S415. Where the liquidator and participator enter into a settlement agreement where the partial payment is expressed to discharge the participator’s obligations in full, or in “full and final settlement” of amounts owning to the company, this also amounts to the release or write-off of the balance.

Equally, where the liquidator does not write off or release the loan balance, but, on a balanced view of the facts, it is clear that the company and/or liquidator are not intending to pursue the outstanding loan, e.g. where they are not making any attempts to collect it or have given up any attempts to do so, then we should argue that the loan has been written off and that S415 ITTOIA05 should apply to the relevant amount.

Example 2

Director loan account £1m overdrawn at the date of the liquidation.

Balance of company assets (i.e. net of creditors), including DLA, a negative balance of £200k.

Here there is no distribution of assets available to the shareholder, he therefore still owes £1m to the company. Again if this is released or written off then the shareholder will be charged on that amount under section 415 ITTOIA05.

A charge under section 415 ITTOIA05 is the right result where there is a loan outstanding after any capital distributions have been made as clearly the shareholder has had the funds out of the company, untaxed, prior to the liquidation.