Today the Chancellor announced that, from 6 April 2016, the rate of tax charged on close companies when they make a loan to a participator (broadly a shareholder) which remains outstanding for more than 9 months will increase from 25% of the value of the loan to 32.5%.

The rationale for the increase is to mirror the new upper effective rate on dividends which also take effect from 6 April 2016. This change is designed to ensure that the loans to participators rules remain an effective deterrent to owner/managers extracting cash from their businesses in a manner that circumvents or defers the income tax that would otherwise be payable on a dividend and/or salary payment.

Although, of wider application, this is another move that targets tax avoidance through the use of personal service companies.

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