As mentioned earlier, the HMRC rate of interest on beneficial loans is highly attractive compared to the Bank of England Base Rate of 5.25% and the higher rates charged by banks for unsecured loans.

When loans are made to participators (generally shareholders) of a close company, there is a potential special tax charge on the company for any loan still outstanding nine months after the end of the accounting period. The current charge is 33.75%, matching the higher rate of tax on dividend income. This tax charge is only refunded to the company once the loan to the participator is repaid or written off.

For example, if Fred, the managing director and controlling shareholder of Bloggs Ltd, is loaned £100,000 interest-free on 6 April 2023 and no repayments are made by 31 March 2024, the company must show a taxable benefit in kind on Fred’s 2023/24 P11d of £2,250 (2.25%). If Fred repays the loan in full before 31 December 2024, there would be no special charge on the company, although Fred would be assessed on the beneficial loan for the nine months it existed in 2024/25.

Note that anti-“bed and breakfast” rules prevent the re-advancement of the loan by the company. These anti-avoidance measures do not apply if the loan is cleared by crediting a bonus or dividend to Fred’s loan account. If Fred repays only £60,000 by 31 December 2024, leaving £40,000 outstanding, there would be a tax charge on the company of £13,500 (assuming the 33.75% dividend rate continues), payable in addition to the company’s corporation tax liability for the year ended 31 March 2024.

The company would show a taxable benefit in kind on Fred’s 2024/25 P11d based on the official rate of interest on beneficial loans for 2024/25. If the company decides to write off or waive the outstanding loan in the year ending 31 March 2025, the £13,500 would be refunded. However, Fred would be assessed on the £40,000 as an income distribution (dividend) at the date of waiver in 2024/25.