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The word ‘interest� has multiple meanings. In the close company context, it typically means “a share or involvement in an undertaking� rather than a payment made to service an outstanding debt.

The word interest is used in two main parts of the legislation. The first is the definition of participator at CTA10/S454:

“For the purposes of this Part, “participator�, in relation to a company, means a person having a share or interest in the capital or income of the company.�

The second occurs in the definition of associate at CTA10/S448. The phrase is used a number of times in that section, but an illustrative example is:

“If [a person,] P has an interest in any shares or obligations of a company which are subject to any trust, the trustees of any settlement concerned [are associates of P]�.

The first definition expressly covers shareholders, but the second requires us to identify individuals who have an interest in the shares or obligations of a company “which are subject to any trust�. The effect is that, where a person does have an interest in shares through a trust, then the trustees of that trust are their associates.

In this context, the word interest covers both a legal and beneficial interest. For example, where shares in a company are held by trustees in a life trust, the trustees will have a legal interest in both the shares and the company itself. The beneficiaries and the remainderman of the trust have a beneficial interest in both the shares and the company. While the nature of a beneficiary’s interest may vary according to the terms of the trust, this is not generally of relevance to whether a beneficiary has an “interest� for the purposes of these provisions.

The close company tests are typically concerned with the rights and powers that an individual possesses. Therefore, it is not typically necessary to consider a beneficiary when determining whether a company is close or not, unless associates of the beneficiary are also participators (see examples below). However, if a close company makes a loan or advance to a beneficiary of a trust, and none of the exemptions apply (see CTM61530 and CTM61540), that beneficiary should be considered a participator and the loan balance should be subject to tax under CTA10/S455. The situation is mirrored if a close company provides a benefit to a beneficiary which is within the definition of distribution at CTA10/S1064.

Example 1

The shares in A Ltd are held by ten individuals, who all hold the same share capital, voting rights, rights to income distributions and capital in a winding-up (10% each).

If all the individuals were unconnected, then A Ltd would not be a close company.

If one of the shareholders, X, was the daughter of a non-shareholder, Y, and Y was the brother of a shareholder, Z, (so that Z was X’s uncle) the company would not be close. The shares of X and Z could still be attributed to Y for the purposes of CTA10/S451 to establish ‘control�, but Y is not a participator so cannot be included for the purposes of CTA10/S439.

If A Ltd were a close company for some other reason, then any loan made by A Ltd to Y would still be within the charge under CTA10/S455, because Y is an associate of a participator.

Example 2

If the facts outlined above were repeated, but Y was also the beneficiary of a trust which was one of the shareholders in A Ltd, then the company would be close. As the beneficiary of a trust, Y is a participator in his own right. This means that the shares possessed by the trustee, X and Z can be attributed to Y.

Any loan made by A Ltd to Y would be within the charge under CTA10/S455, because Y is a participator in his own right.