CheckLists.Tax (beta)
K10. Repayment of a loan
GENERAL
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- What amounts to repayment?
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- Set off against an account in credit (CTM61565)
- "no doubt that a book entry can constitute payment" if it reflects the underlying reality and is properly recorded (CTM61600).
- Set-off of shareholder right to distribution against debt during solvent liquidation is repayment (CTM61559).
- No requirement for the repayment to be made by the debtor (CTM61600).
- HMRC may/do not regard borrowing from one connected company to pay another connected company as repayment (CTM61602).
- Repayment in kind is based on market value of the asset transferred (CTM61604).
- Query whether assignment of debt for consideration is regarded by HMRC as repayment (CTM61605).
Legislation:
Cases: Ramsden v. CIR 37 TC 619; Minsham Properties Ltd v Price 63 TC 570;
HMRC manuals: CTM61565;
Commentary: Practical Point re Combining Accounts (L Skyes);
See also:
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Identify what the outstanding debt is
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- Debts in reciprocal directions where the evidence indicates there is genuinely a single account (CTM61565).
- Opposing demands connected by originating in the same transaction are treated as a single debt.
- Nature of dealings may indicate that the agreement is for a single debt.
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- Which debt has been repaid?
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- If multiple debts, debtor can specify which debt is being repaid.
- If not specified, earliest debt treated as satisfied first.
Legislation:
Cases:
HMRC manuals: CTM61600;
Commentary:
See also:​
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INCOME TAX
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Employment income
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- Credit against employee debt may be employee remuneration
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- Indebtedness may be cleared by a credit of employee remuneration against the debt (CTM61600).
Legislation:
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- Employer paying employee's debt to third party chargeable as general earnings
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- For example, paying off the employee's student loans (EIM21747).
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Shareholders
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- Indebtedness repaid by dividend/distribution taxable as such
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- Indebtedness may be cleared by a credit of a declared dividend against the debt (CTM61600).
Legislation:
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Commentary:
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Transactions in securities
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- Redemption of debenture is a transaction in securities
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- In IRC v. Parker, a company capitalised part of its profit and used that money to issue debentures to shareholders in proportion to their shareholdings. 7 years later it redeemed the debentures. TiS held to apply on the basis that redeeming the debentures was a transaction in securities and the income tax advantage only arose upon redemption.
Legislation:
Cases: IRC v. Parker [1966] AC 141;
HMRC manuals:
Commentary:
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- Acquisition of insolvent company with intention to fund it to repay worthless debts caught
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- Bamberg v. HMRC [2010] UKFTT 333 (TC) - T bought an insolvent company and debt owed by that company before selling the company to his own company that lent money to the insolvent company to allow its debts to be repaid.
Legislation:
Cases: Bamberg v. HMRC [2010] UKFTT 333 (TC);
HMRC manuals:
Commentary:
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Settlements legislation
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- Loan repayment made to settlor/spouse is capital sum for the purposes of income matching under s.633
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General rule
- Repayment of a loan is a capital sum such that where the settlor did not otherwise retain an interest in a settlement, income can be matched under ITTOIA s.633.
- Reference to settlor includes reference to spouse (s.634(7)).
- No income to match if it has already been treated as income of the settlor under s.624 (ITTOIA s.635(3)(c)).
- See i8. Distribution by trust for further notes.
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Meaning of loan
- Loan does not include outstanding purchase consideration for asset bought from settlor (CTM61080).
- Does include a loan to the trustees by one of the trustees (De Vigier).
- Query the position where there is only one trustee.
​Loan by close company
- Can apply to repayment of a loan by a close company where further conditions are satisfied (CTM61060).
Repayment made to third party
- Can apply to repayment of loan to third party if at settlor's direction or for his/her benefit (ITTOIA s.634; CTM61100).
Sum lent back to trust (stop matching to repayment in future tax years)
- Where:
(1) The settlor (or spouse) lends a sum to the trust.
(2) A capital sum is paid to the settlor by way of complete repayment of the loan.
(3) Subsequently, the settlor lends an amount to the trust that is at least equal to the capital sum in (2).
Then: no income is matched to the capital sum that is the repayment in any tax year after the further loan is made (s.638(5)).
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Legislation: ITTOIA s.634(1);
Cases:
De Vigier v. IRC 42 TC 25;
HMRC manuals: CTM61050;
Commentary: Chamberlain, §11.47;
See also:
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- Repayment of loan to third party at settlor's direction treated as capital payment to settlor (settlor has deemed income)
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- Repayment of a loan is a capital payment for the purposes of ITTOIA s.633.
- A capital payment paid by the trustees to a third party at the settlor's direction etc. is treated as paid to the settlor (s.634(5)).
- Accordingly a loan repayment to a third party by the trustees at the direction of the settlor is treated as a capital payment to the settlor.
- See i8. Distribution by trust for further notes.
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Legislation:
Cases:
HMRC manuals: CTM61100;
Commentary:
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- Settlor/spouse receiving loan repayment from company connected with trust: deemed capital sum by trust to settlor if company has received associated payments
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Background
- Where the settlor/spouse of a trust receives a capital payment from the trust, income of the trust can be matched to that capital sum and taxed on the settlor (ITTOIA s.633).​
- Capital sum means: (i) loan; (ii) repayment of a loan; (ii) any sum paid other than as income and not for full consideration.
- See i8. Distributions to beneficiaries for further notes.
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Capital sums by connected company deemed to be made by trustees
- Where:
(1) A capital sum (including loan, repayment of loan) is paid to the settlor by a body corporate connected with the settlement; and
(2) The trustees make an associated payment (directly or indirectly) to the body corporate,
Then: the capital sum is treated as paid by the trustees to the settlor for the purposes of s.633 (ITTOIA s.641).
- Connected body corporate - see s.637(8).
- Reference to settlor includes spouse (s.643(1)).
- For meaning of associated payments and quantum of capital sum etc. see i8. Distributions to beneficiaries.
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Payment in respect of director loan account
- Could be a capital payment by the company.
- HMRC say that unpaid remuneration normally the first source of payments, but not always (CTM61070).
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Associated body corporate
- A payment by/to a body corporate which is associated with another body corporate may be treated as paid by/made to that other (s.643(4)).
- Associated - see CTA 2010 s.449.
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Exclusion for certain loan repayments
- Repayment of loan to settlor by a body corporate is not caught where (s.642):
(1) The whole loan is repaid to the settlor within 12 months.
(2) No loans by any connected body corporate have been outstanding for more than 1 year "in any period of 5 years".
(3) No loans made by the settlor to any connected body corporate have been outstanding for more than 1 year "in any period of 5 years".
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Legislation:
Cases:
HMRC manuals: CTM61070;
Commentary:
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Transfer of assets abroad
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- Benefits charge: repayment either not a benefit or nil value
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- Creditor receives what is due to him/her. Query whether there is a practical benefit in having the money rather than the debt.
- If repayment is a benefit, does not appear to have a measurable value for the purposes of ITA 2007, s.733(1) and note that the valuation rule for a loan to a beneficiary only treats the rate of interest as the benefit (s.742C).
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Legislation:
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CORPORATION TAX
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Close companies
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- Repayment of s.455 tax can be claimed
- Right to claim relief within 4 years of end of financial year in which release, writing off or repayment occurs (CTA 2010, s.458).
- Tax need not be paid if release, writing off or repayment occurs within 9 months of period in which loan made CTA 2010, s.458(4)).
- HMRC say loan and repayment do not need to be included in the tax return if within the same accounting period - the claim is implicit (CTM61600).
- Date of repayment where cleared by dividend is date of credit against loan account, not date dividend declared, if different (CTM61600).
Legislation: CTA 2010, s.458;
Cases:
HMRC manuals: CTM61600;
Commentary:
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- > Anti-avoidance rule (pre-30 October 2024)
- s.464C
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- > Anti-avoidance rule (from 30 October 2024)
- s.464ZA
Legislation: FA 2025, s.81;
Cases:
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VAT
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Output tax
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- VAT on debt collection activities
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VTAXPER49000
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