Close Company Rules & Corporation Tax Explained

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:

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 3.75% for 2025/26). 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

When a director lends money to the company, the interest the company pays is deductible for corporation tax purposes. However, UK companies must generally deduct 20% income tax at source from "yearly interest" paid to individuals and account for it to HMRC via form CT61 (ITA 2007 s.874). This obligation applies to all UK companies — not just close ones.

In practice, this means that if you've lent money to your own company and the company is paying you interest, it must pay you the interest net of 20% tax and submit a CT61 return to account for the tax deducted.

How Close Company Status Affects Your CT600

There is no single "Is this company a close company?" checkbox on the CT600. Instead, close company status is reflected through specific boxes:

Box 4 — Type of company

Box 4 is where close investment-holding company (CIHC) status is declared. Enter 2 if the company is a close investment-holding company; most close trading companies enter 0. Getting this wrong matters: a CIHC pays the 25% main rate from the first pound of profit, with no access to the 19% small profits rate or marginal relief.

Box 95 — Loans to participators

Box 95 — "Loans and arrangements to participators by close companies" — is the indicator for close company loans. Tick this if the company has made loans or advances to directors or shareholders that are outstanding at the period end. Box 95 triggers the requirement to file the CT600A supplementary page, and the resulting S455 tax flows into box 480 on the main CT600.

Getting these boxes wrong can lead to:

• Paying the wrong tax rate (if Box 4 is incorrectly omitted for a CIHC)
• Missing the S455 charge (if Box 95 and CT600A are omitted when a director's loan is outstanding)
• 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:

1. The company is a close company, AND
2. There are loans or advances to participators outstanding at the period end, AND
3. 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 more significant because the main rate rose to 25%. 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 set Box 4 to 2 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.

Commercial property letting companies are generally not CIHCs. CTA 2010 s.18N expressly excludes from the CIHC definition a company whose business consists wholly or mainly of making investments in property that is let commercially to persons who are not connected with the company. A standard buy-to-let company letting properties to independent tenants qualifies for the small profits rate and marginal relief — Box 4 is 0, not 2.

CIHCs are typically purely passive investment vehicles: companies that hold listed shares, bonds, or other financial instruments without carrying on any active business. 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:

• CTA 2010 ss.464C–464D: Prevents "bed and breakfasting" — repaying a loan and immediately re-borrowing. If a loan of £5,000 or more is repaid and a new loan is taken within 30 days, the repayment is ignored for S455 purposes.
• 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. However, two separate anti-avoidance rules can reclassify these as income:

Phoenix company TAAR (ITTOIA 2005 s.396B): If a shareholder continues — or intends to continue — a similar trade or activity after the company is wound up, and the main purpose of the arrangements was to obtain an income tax advantage, HMRC can treat the distribution as income (taxed as a dividend). There is no minimum distribution threshold for this rule to apply.

Informal strike-off (CTA 2010 s.1030A): When a company is dissolved informally (without formal winding up) and total distributions to shareholders exceed £25,000, all distributions are automatically treated as dividends rather than capital gains — regardless of whether the shareholder continues a trade.

Both rules apply only 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. Box 4 is 0 (normal company). Because there's no overdrawn DLA and no loans to participators, Box 95 is unticked and no CT600A is needed. 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:

• Enter 0 in Box 4 (normal close trading company)
• Tick Box 95 for Director A's £12,000 loan
• Complete CT600A for the loan details
• Calculate S455: £12,000 x 33.75% = £4,050
• Pay £4,050 alongside corporation tax (entered via box 480)

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 is a close company — but it is not a close investment-holding company. CTA 2010 s.18N expressly excludes from the CIHC definition a company whose business consists wholly or mainly of letting property commercially to persons not connected with the company. This means:

• Box 4 is entered as 0 (normal company) — not 2
• The company qualifies for the 19% small profits rate on profits up to £50,000, and marginal relief between £50,000 and £250,000
• S455 still applies to any outstanding loans to the couple (director's loan accounts)
• The 25% main rate only applies if profits exceed £250,000

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 filing for a close company, the key steps are:

1. Box 4 — Type of company: Enter 0 for a normal close trading company; enter 2 if the company is a close investment-holding company.
2. Box 95 — Loans to participators: Tick if the company has outstanding loans or advances to participators at the period end. This triggers the CT600A requirement.
3. CT600A if required: If Box 95 is ticked, complete the CT600A supplementary page with details of each participator loan and the S455 tax calculation (33.75% of the outstanding amount). The S455 tax flows into box 480 on the main CT600.
4. Include S455 in the payment: S455 tax is payable alongside corporation tax by the same 9 months + 1 day deadline.

For close trading companies with no overdrawn director's loan accounts and no loans to other participators — which is the majority of small limited companies — the filing is no more complex than any other CT600.

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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 or commercial property letting 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 95 wrong on the CT600?

There's no specific penalty for an incorrect box tick alone. But if you incorrectly omit Box 95 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 consideration: shareholders of a qualifying close company may be eligible for Business Asset Disposal Relief when winding up — currently 14% CGT for disposals on or after 6 April 2025 (rising to 18% from 6 April 2026) — potentially lower than income tax on equivalent dividend distributions. However, BADR is available to qualifying shareholders of any company, not just close ones.

Filing a CT600 for your close company? Taxpipe handles the CT600 main form — trading income, property income, chargeable gains, and marginal relief calculated automatically. £59 per filing, no accountant required. Start filing →

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