Q&A: close companies and waived loans

Croner VIP Tax Team

In this week’s Q&A, Ayesha Choudhury, adviser at Croner VIP Tax Team, explains the intricacies of close company waived loans and potential corporation tax charges.

Q. Two shareholders loaned money to a close company; they are sisters of the other shareholder. In 2022, the shares owned by the two sisters were transferred to the remaining sister who is now the new shareholder with 100% of the shares. The loans that were made by those sisters when they were shareholders have now been waived.

Is there any tax charge on the company and are any reliefs available for the sisters waiving their loan?

A. Where a company’s debt is released, this produces a credit which is chargeable to corporation tax as income, because all profits arising to a company from its loan relationships are ordinarily chargeable to tax.

This will be in line with the amount recognised for accounting purposes per s307 Corporation Tax Act (CTA 2009). The credit will be taxable unless it falls within one of the exemptions in Cs322 CTA 2009.

In summary, these are the key exemptions:

1. the release is part of a statutory insolvency arrangement;

2. the release is in consideration of, or of any entitlement to, shares forming part of the ordinary share capital of the debtor company, ie, a debt for equity swap;

3. the debtor company meets insolvency conditions including that it is in insolvent liquidation, insolvent administration or insolvent administrative receivership and the debtor company relationship is not a connected company relationship;

4. the liability is released in consequence of the exercise of a stabilisation power under Part 1, Banking Act 2009;

5. immediately before the release it is reasonable to assume that, without the release (and any arrangements of which the release forms part) there would be a material risk that the company would be unable to pay its debts at some time within the next 12 months. The release must not be a deemed release nor a release of relevant rights.

In the sister scenario set out above, there is no mention that the loans were irrecoverable before they were waived nor is there any indication that the company is carrying on a trade.

In any case, as the two sisters released the loans, they are not loans that are outstanding and have become irrecoverable but have simply ceased to exist.

Therefore, no loss relief is available under s253 Taxation of Chargeable Gains Act 1992 (TCGA). This issue was raised at the Upper Tribunal in the decision HMRC v Bunting (2025) UKUT 00096 (TCC) where the judge refused relief, stating: ‘We find that once a loan has been voluntarily waived or released, it can no longer be “outstanding” on the normal usage of that word.’

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