Close Company Rules & Corporation Tax: What Every Director Needs to Know

If you run a typical UK limited company — you're the sole director, or you share ownership with one or two others — your company is almost certainly a close company. And that designation triggers a set of specific tax rules that affect how you file your CT600.

Most directors have never heard the term. But close company status determines whether S455 tax applies to director's loans, how benefits in kind are taxed, and whether certain anti-avoidance rules kick in.

Here's what "close company" means, how to check if yours qualifies, and what it means for your corporation tax return.

What Is a Close Company?

A close company is a UK-resident company controlled by:

Five or fewer participators, or
Any number of participators who are also directors

A "participator" is anyone who has a share or interest in the company — this includes:

Shareholders (even with just one share)
Anyone entitled to acquire share capital
Loan creditors (people who've lent money to the company in certain circumstances)
Anyone entitled to a distribution from the company

The practical test

For most small limited companies, the answer is simple:

Company type	Close company?
Sole director/shareholder	✅ Yes
Husband and wife company	✅ Yes
3 friends running a business together	✅ Yes
Company with 4 shareholders, all directors	✅ Yes
Company with 20+ unrelated shareholders	❌ Probably not
PLC listed on a stock exchange	❌ No (specific exemption)

In practice, the vast majority of UK private limited companies are close companies. HMRC estimates over 90% of UK companies meet the definition.

The "associate" rules

When counting the five participators, HMRC groups together associates. Your associates include:

Your spouse or civil partner
Your parents, grandparents, children, grandchildren
Your siblings
Your business partners (in other businesses)
Trustees of settlements you've created

So a company with 6 shareholders — a husband, wife, and their 4 children — is still a close company because the family members are all associates of one another, counting as a single participator group.

Why Does Close Company Status Matter?

Close company status triggers several specific corporation tax consequences:

1. S455 Tax on Loans to Participators

This is the biggest practical impact. When a close company lends money to a participator (or their associate), Section 455 CTA 2010 imposes a 33.75% tax charge on the outstanding loan balance.

The most common scenario: your director's loan account is overdrawn — meaning you've taken more money out than you've been paid in salary and dividends. The company must pay S455 tax on the overdrawn amount unless it's repaid within nine months and one day of the year-end.

Rate: 33.75% of the outstanding loan
Reported on: CT600A supplementary page
Refundable: Yes, once the loan is repaid

This rule only applies to close companies. If your company isn't close, S455 doesn't apply.

2. Benefits in Kind — Extended Rules

For non-close companies, benefits in kind (BIK) only apply to employees and directors. For close companies, the BIK rules extend to:

Participators who aren't employees
Associates of participators

So if your company (which you own) provides a benefit to your spouse who isn't an employee — say, use of a company vehicle — that's a taxable BIK because your spouse is an associate of a participator.

3. Loans to Participators Creating a BIK

When a close company provides a loan of £10,000 or more to a participator (or associate), it creates a benefit in kind based on the official rate of interest (currently 2.25%). This must be reported on form P11D, and the company pays Class 1A NIC on the benefit.

This applies even if S455 tax is also due — they're separate charges.

4. Transfer of Assets at Undervalue

If a close company transfers assets to a participator (or their associate) at less than market value, the difference can be treated as a distribution — meaning it's taxed like a dividend on the recipient.

For example, if your company owns a vehicle worth £15,000 and sells it to you for £5,000, the £10,000 difference is treated as a distribution.

5. Loans to the Company from Participators

The reverse situation — where a director lends money to the company — also has close company implications. Interest paid by the company on the loan is deductible for corporation tax purposes, but the company must deduct 20% income tax at source and report it to HMRC.

This doesn't apply to non-close companies, where interest can be paid gross to UK-resident lenders.

How Close Company Status Affects Your CT600

Box 40: Is the company a close company?

The CT600 asks directly: "Is the company a close company?" (Box 40). You must tick yes or no. Getting this wrong can lead to:

Missing the S455 charge (underpayment)
Filing unnecessary supplementary pages (admin headache)
HMRC enquiry into your return

CT600A Supplementary Page

If your close company has made loans to participators (overdrawn DLA), you must complete the CT600A — "Loans to Participators by a Close Company."

This page requires:

Names of participators with outstanding loans
Amounts outstanding at the period end
S455 tax calculated at 33.75%
Details of any repayments made

CT600A is only required if:

The company is a close company, AND
There are loans or advances to participators outstanding at the period end, AND
The loans weren't repaid before the filing date

If your DLA is zero or in credit (the company owes you), you don't need the CT600A even though the company is close.

The "Close Investment-Holding Company" (CIHC) Problem

There's a specific type of close company that gets worse tax treatment: the close investment-holding company.

A CIHC is a close company that exists wholly or mainly for one or more of:

Holding investments
Holding land (not as trading stock)
Dealing in shares, securities, or land (not as a trade)

Why it matters

Before April 2023, CIHCs paid the main rate of corporation tax even on small profits (when the small profits rate was lower). Since April 2023, the distinction is less dramatic because the small profits rate returned for all companies. However, CIHCs still:

Pay the main rate (25%) from the first pound of profit — they don't qualify for the small profits rate (19%) or marginal relief
Must be identified on the CT600

Checking if your company is a CIHC

Most trading companies are NOT CIHCs, even if they hold some investments on the side. The test is whether the company exists wholly or mainly to hold investments. A company that trades actively but also has a small investment portfolio is not a CIHC.

Property companies that actively manage and let properties may argue they're trading rather than investment-holding, but this is a grey area. If in doubt, take professional advice.

Anti-Avoidance Rules Specific to Close Companies

Loans in lieu of remuneration (S455 intent)

HMRC specifically watches for close company directors who take loans instead of dividends to avoid dividend tax. While taking a loan isn't illegal, failing to repay it and avoiding S455 is tax avoidance.

The anti-avoidance provisions include:

S455(3A): Prevents "bed and breakfasting" — repaying a loan and immediately re-borrowing
S464A: Catches arrangements where someone provides a loan to enable the participator to repay their director's loan

Distributions in a winding up

When a close company is wound up and distributes assets to shareholders, amounts above the original share capital are usually treated as capital gains (eligible for Business Asset Disposal Relief at 10%). However, HMRC's Transactions in Securities rules (ITA 2007, ss 684-713) can reclassify these as income if the main purpose was to obtain an income tax advantage.

Since March 2016, specific rules (CTA 2010, s396B) can treat distributions during informal strike-off as income (dividend) rather than capital if:

The company has £25,000+ to distribute
The shareholder continues a similar trade within 2 years
The main purpose is to gain a tax advantage

This is the "phoenix company" anti-avoidance rule, and it only applies to close companies.

Personal service companies (IR35)

While IR35 isn't exclusively a close company issue, HMRC's intermediaries legislation specifically targets situations where an individual provides services through a company they control — which is, by definition, a close company.

Exceptions: When a Company ISN'T Close

Certain companies are excluded from close company status:

1. Companies controlled by non-close companies

If a non-close company (e.g., a listed PLC) owns more than 50% of your company, your company isn't close.

2. Listed companies

A company whose shares are listed on a recognised stock exchange and that has at least 35% of its shares held by the public is not close.

3. Companies with many unrelated shareholders

If a company has enough genuinely independent shareholders that no five of them (including associates) control it, it's not close.

In practice, these exceptions rarely apply to small limited companies run by their directors.

Practical Scenarios

Scenario 1: Sole director/shareholder, no loans

Your company is close. You tick "Yes" in Box 40. But because there's no overdrawn DLA and no loans to participators, you don't need the CT600A. Close company status has minimal practical impact on your CT600.

Scenario 2: Two directors, one has an overdrawn DLA

Both directors are participators. Director A owes the company £12,000 at year-end. The company must:

Tick "Yes" for close company (Box 40)
Complete CT600A for Director A's £12,000 loan
Calculate S455: £12,000 x 33.75% = £4,050
Pay £4,050 alongside corporation tax

Director B's DLA is in credit — no CT600A entry needed for them.

Scenario 3: Property investment company

The company holds 3 buy-to-let properties and has 2 shareholders (a married couple). It's a close company AND potentially a close investment-holding company. This means:

No small profits rate — corporation tax at 25% from the first pound
S455 applies to any loans to the couple
The CIHC status must be indicated on the CT600

Scenario 4: Family company with 6 shareholders

Parents and 4 adult children each hold shares. Despite having 6 shareholders, they're all associates of each other. The family counts as one participator group. The company is close (controlled by one participator group).

Filing Your CT600 as a Close Company

When you file with Taxpipe:

We ask if the company is close — for most small companies, the answer is yes
If you have an overdrawn DLA, enter the amount and we generate the CT600A automatically
S455 tax is calculated and included in your tax liability
The return is filed with the correct supplementary pages attached

You don't need to understand the legislation — just answer the questions honestly and Taxpipe handles the technical mapping.

File your CT600 now →

Frequently Asked Questions

How do I know if my company is a close company?

If it's a UK private limited company with five or fewer shareholders (counting family groups as one), it's almost certainly close. Over 90% of UK companies are. When in doubt, the test is whether five or fewer participators (or participators who are directors) control the company.

Does close company status affect my corporation tax rate?

Not for trading companies. The corporation tax rates (19% small profits, 25% main rate) apply equally to close and non-close trading companies. However, if your company is a close investment-holding company, you pay 25% from the first pound — no small profits rate or marginal relief.

Can I avoid close company status?

In theory, by bringing in enough independent shareholders so that no five participators control the company. In practice, this isn't feasible for most small businesses and shouldn't drive your company structure.

What's the penalty for getting Box 40 wrong on the CT600?

There's no specific penalty for mis-ticking Box 40 alone. But if you incorrectly say "No" and consequently don't file the CT600A or pay S455 tax, the resulting underpayment attracts interest and potentially penalties for an inaccurate return.

Does my company need to be close for the whole period?

S455 and other close company rules apply if the company was close at any point during the accounting period. A company that was close for part of the year and non-close for the rest is still subject to the rules for the close period.

Are there any benefits to being a close company?

Not many. One minor benefit: close companies can claim entrepreneur's relief (now Business Asset Disposal Relief) provisions when winding up, which may allow shareholders to pay 10% CGT rather than dividend tax on distributions. However, this is available to all qualifying companies, not just close ones.

Filing a CT600 for your close company? Taxpipe handles everything — including S455 calculations, CT600A supplementary pages, and marginal relief. £59 per filing, no accountant required. Start filing →