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Information for small businesses & individuals


Close Companies

What is a close company?

A company is close if it is UK resident and either condition A or B is met:

Condition A:

It is under the “control” of:

  • Five or fewer participators, or
  • Participators who are directors.

Condition B:

That five or fewer participators, or participators who are directors together possess or are entitled to acquire:

  • Such rights on a notional winding up of the company, as would entitle them to receive the greater part of the assets of the company available for distribution amongst the participators, or
  • Such rights as would, in that event, so entitle them if there were disregarded any rights which any of them or any other person has as a loan creditor in relation to the company or any other company.


A company is not close if:

  • It is non-UK resident
  • It is an industrial and provident society, or a building society
  • It is controlled by the Crown
  • It is controlled by another company which is not close
  • A non-UK resident company controls it, unless that company would be considered close if it were resident.
  • It is quoted and had a share deal within the last 12 months, 35% of the share capital owned by the general public (and this includes non-close companies). This exemption does not apply if the principal members hold more than 85% of the shares.
    • Principal members are the five shareholders with the greatest voting power, excluding any who own less than 5%. In the event of two shareholders possessing equal voting power, principal members can be one of six or more persons.
    • The term “general public” includes non-close companies and unconnected approved pension funds, and excludes directors, associated companies, employee or director benefit funds, and principal members
 The majority of UK registered private companies are close companies.

Key definitions:

“Director”: any individual who:

  • Acts as a director, regardless of title (for instance a “shadow director”), or
  • Is concerned with the management of the business, and together with his associates controls more than 20% of the company’s ordinary share capital.

“Participator”: simply any person who has any financial interest in the company, by way of interests in:

  • Share capital or voting rights, or
  • Loan creditors, or,
  • Possesses or is entitled to acquire a right to receive or participate in distributions of the company or in amounts payable by the company (in cash or kind) to loan creditors by way of premium or redemption.
  • Any person who entitled to secure that income or assets of the company, whether present or future of the company will be applied directly or indirectly for their benefit.

 A participator may have rights “attributed” to him, such as those of his nominees, his associates, and the nominees of his associates, but not the associates of the associates.

To work out if someone is a participator, you must factor in the rights of his "associates"

 “Associate”: an individual's: 

  • Husband or wife, including separated spouses, but not divorced spouses.
  • Parents, grand parents and remoter forebear
  • Child or grand child or remoter issue
  • Brother or sister, including half siblings, but not stepsiblings. Blood is what matters!
  • Partner
  • Settlements and will trust associates
  • Trustees are associates where the individual, or any living or dead relative is or was the settlor,
  • Trustees are associates where the individual is interested in a settlement, as beneficiary or remainder man.
  • Attributed company associates. One can also be attributed rights by reason of control of another company.


Control means the ability to direct control over the company’s affairs. The Court of Appeal held that control over the company’s affairs as defined in section 416 ICTA 1988 means control at the level of general meetings to make the ultimate decisions as to the business of the company.

It is important to recognise that the managing director and main ordinary shareholder, who makes all the decisions at board level, will not always be in control. It depends how you look at it. Another participator may have greater rights from shares, rights to assets, loan creditor and attributed rights of associates.

What this means is that control can apply to people who have no real control over the company’s affairs, but who are just taken to have control for the purposes of tax. The effects can seem improbable and unjustified at times. 

To determine who is in control look at:

  • Share ownership
  • Voting power
  • Any rights conferred in the Memorandum and Articles, or other rights.
  • Attributable rights – of associates, of nominees, or beneficial entitlement.
  • Entitlement to assets on winding up, with and without loan creditors.

It is possible that a number of participators, (after considering everyone's attributable rights i.e. nominees and associates) can be found to control a company.

HMRC will take the minimum controlling combination of persons to see who is controlling what. There is no hierarchy or someone being more in control than someone else. Where a number of factors will give a different result, then it becomes possible for a number of persons to be in control. You can get some interesting results when “Loan creditors” (see below) are brought into play, and this element is quite possibly going to generate the most confusion when you are attempting to attribute controlling rights in practice.

“Loan creditors”

A loan creditor in terms of close company control means a creditor in respect of any redeemable loan capital issued by the company, or in respect of any of the following by the company:

  • For money borrowed or capital assets acquired, or
  • Any right to receive income created in favour of the company, or
  • For consideration, the value of which to the company, was when the debt was incurred, substantially less than the amount of the debt, and any premium attaching.
Any of the following will not be classed as loan creditor:
  • Normal trade creditors
  • Hire purchase creditors
  • A person who carries on the normal business of banking.
Typically a loan creditor will be another company or a relative.

Recent cases

In William Reeves v HMRC [2017]TC05680, a US citizen’s claim for CGT hold-over relief was denied when applying wide-ranging tests for control in s416 ICTA 1988:  his shareholding was attributed to his wife or children.

In Kellogg Brown v HMRC [2010] considered the tests in s416 (now s450(5): Where two or more persons together satisfy any of the conditions of subsection (2), they shall be taken to have control of the company and found it should have its natural meaning.

Further advice?

Contact SIL Solutions (Tax advisers with a difference)

Tel: 0207 993 5016
Or just click to complete the form. 


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