News

Loans are a familiar feature of many estate planning strategies. They are versatile and, by comparison to outright distributions, preserve flexibility for families and individuals whose circumstances and priorities are often dynamic.

For families and individuals with offshore trust and company structures, loans – and specifically loans made from overseas companies - can be particularly useful. For example, a loan made from a non-UK resident company (where owned by a trust that is not subject to UK inheritance tax) will remain outside of the scope of UK inheritance tax even where the funds are advanced to a person resident in the UK (save where the proceeds of the loan are used in connection with UK residential or, now, agricultural property). A further potential benefit is that in certain circumstances the outstanding debt may reduce the value of the borrower’s estate for inheritance tax purposes. Accordingly, the value of the loan may remain outside the scope of UK inheritance tax, while the corresponding liability may nonetheless reduce the borrower’s taxable estate.

It is of relevance to clients and advisers involved with structures like these that the 2026 Budget confirmed that, as part of a wider reform of the taxation of distributions from non-UK resident companies, the government is considering reforms to the taxation of loans from overseas resident companies. The idea is to bring in line (or closer in line) the treatment of loans advanced from overseas closely controlled companies with the treatment of loans made from UK closely controlled companies. Domestically, loans from UK resident close companies are taxed as if they were a dividend (albeit with the tax payable by the company) when made to a person closely connected with the company. The tax can be refunded if and when the loan is repaid back to the company.

For UK resident individuals who own or are connected with overseas closely controlled companies, the proposals could materially impact the cost of accessing company funds via loans. Unlike a dividend, a loan does not ordinarily constitute taxable income when received, therefore allowing long-term access to those funds without the tax cost (now up to 35.75%) associated with a dividend. It is this scenario which the proposed regime would target by imposing a charge on the UK resident borrower.  

Any changes would be expected to take effect from April 2028, following a technical consultation on the detailed design of the regime and draft legislation in 2027. Those potentially affected will be well advised to follow the outcomes of this process in order to enable an early review of any restructuring that may be necessary.

The regime for UK companies

The domestic ‘loans to participators’ regime, which is contained in section 455 of the Corporation Tax Act 2010, imposes a charge to tax on loans or advances made by ‘close companies’ to ‘participators’.  Broadly, a ‘close company’ is a UK resident company controlled by five or fewer participators, or by any number of directors who are participators.  A ‘participator’ is someone with an interest in the capital or income of the company, most commonly a shareholder (but can also include the company’s creditors).

Section 455 imposes a charge to tax where a close company makes a loan or advances money to a participator or an associate of a participator.  The charge can also apply where the recipient is the trustee of a settlement of which a participator or associate is a trustee or an actual or potential beneficiary, or a partnership which includes a participator or an associate of a participator. The rules therefore extend beyond loans made directly to shareholders and can apply where funds are advanced through connected trusts or partnerships.

The section 455 tax is payable by the company at the upper dividend rate (now 35.75%) for the tax year in which the loan is made.  Payment is due if the loan remains outstanding after nine months after the end of the accounting period in which the loan was made. It does however function only as a temporary tax, which is refunded to the company if and when the loan is repaid.

The purpose of the section 455 charge is to discourage shareholders from accessing company profits through loans rather than taxable dividends. Without it, a shareholder could enjoy the use of those profits while postponing, potentially indefinitely, the income tax that would arise on a dividend. The temporary charge places a tax cost on the borrowing without treating the loan itself as a distribution.

The current position for non-UK resident companies

Non-UK resident companies are not generally treated as close companies for the purposes of section 455, and there is currently no directly equivalent charge for loans made by overseas companies that would be close if UK resident. A loan may therefore allow a UK resident shareholder to access funds from a closely controlled overseas company without an immediate income tax charge. For example, a shareholder might borrow to meet personal expenditure rather than receive a dividend, leaving the debt outstanding over an extended period, potentially being written off only at some future time when the borrower has left the UK and is outside the scope of a UK tax charge on the deemed dividend arising from loan write-off.

The government’s proposals

To counteract this strategy the government is now considering a corresponding regime for non-UK resident companies which would apply to loans from companies that would be close if they were UK resident.  As non-UK resident companies typically are not within the charge to UK tax, the government proposes that the charge would fall upon the UK resident borrower and be paid through his or her tax return following the tax year and self-assessment framework.

The government’s consultation outlined four options for how the regime might work.

1          A section 455 style charge arising if the loan remained outstanding on 31 January following the end of the tax year in which it was made, with release or write-off subject to income tax.

As with the domestic section 455 regime, this would permit borrowers to use the funds without a tax charge for only a very limited period. 

2          A section 455 style charge arising after a set period from the time the loan was made (say, three years), with release or write-off subject to income tax.

This would allow borrowers more time to repay the loan before a charge arose and would therefore have less impact on genuine temporary borrowing.  Depending on the length of the set period, taxpayers could still obtain short-term use of overseas company funds without an immediate UK tax charge.

3          A charge arising only on release or write-off.

This would broadly preserve the current position for most affected clients. Provided that the loan remained legally outstanding and was not released or written off, clients could continue to have long-term use of overseas company profits for personal purposes while deferring any UK charge. As it would do relatively little to address the supposed gap identified in the existing legislation, it may be less likely that the government will proceed with this option.

4          Deemed release or write-off after a set period (say, 5 years), giving rise to a charge.

On its face, this appears similar to option 2. However, option 2 would impose a temporary section 455 style charge, for which relief would be available if the loan were subsequently repaid. By contrast, option 4 would treat the outstanding loan as having been released or written off, giving rise to an income tax charge on the recipient, which presumably would not then be refundable. 

The UK tax treatment of any later repayment of the loan, which under the relevant governing law of the loan arrangement would remain outstanding and repayable, would need to be clarified. In particular, would the deemed-write-off be confined to the proposed income tax charge, rather than applying for all UK tax purposes including inheritance tax? This would be relevant to both the deductibility of the outstanding debt from the borrower’s estate and to whether repayment of the loan would be treated as a transfer of value. Presumably it would need to be so confined.

Taxpayers would therefore need to ensure that a loan was repaid before the end of the specified period if they wished to avoid an income tax charge. This option could consequently preserve the opportunity to use overseas company funds without an immediate charge in the medium-term, but with potentially more significant consequences if the loan remained outstanding beyond the deadline.

Final comments

While the final design of the regime remains uncertain, accessing funds from closely controlled non-UK resident companies through loans on more than a temporary basis is likely to become less appealing from April 2028.

All of the proposed options are likely to create cash-flow difficulties if the loan remains outstanding beyond the permitted period, as the recipient would face a personal tax liability despite having received a loan rather than a distribution and thus being legally indebted to the lending company for the full amount.

Clients are often surprised that the existing section 455 regime applies even where the loan advance carries a commercial rate of interest. It will be interesting to see whether the same would apply within any regime introduced for overseas companies. The consultation seems to suggest that the regime should not curtail normal commercial activity (although a loan made on commercial terms will not necessarily represent normal commercial activity).

Another point of technical interest will be how any regime introduced would interact with existing anti-avoidance rules, such as those that apply to loans made to beneficiaries on non-commercial terms and that are therefore considered to represent a capital benefit.

So UK resident individuals who are debtors under existing loans from overseas companies, or who may require access to company funds in future, should review their arrangements before the new rules are finalised. In particular, they should consider the purpose and terms of any loan, the likely timetable for repayment and whether alternative methods of extracting funds may be more appropriate. The publication of draft legislation in 2027 should provide an important opportunity to assess the potential exposure and take advice before the reforms take effect.

Contributors:

Oliver Bishop is a Partner in the Private client department at Sinclair Gibson.

Joseph Dalton is a Trainee Solicitor in the Private Client department.