Can a company lend money to a shareholder

Generally yes. The Companies Act rules requiring members’ approval for loans apply to directors, so a private company can lend to a shareholder who is not a director without a members’ resolution. The loan must still be a genuine loan made for the company’s benefit, because a loan that is never meant to be repaid can be a disguised distribution, and a close company faces section 455 tax and possible distribution treatment of any benefit.

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Does company law allow a loan to a shareholder who is not a director?

Chapter 4 of Part 10 of the Companies Act 2006 controls loans, quasi loans and credit transactions, but it is aimed at directors. Section 197 says a company may not make a loan to a director of the company or of its holding company unless the members approve it; see loans to directors and member approval. A shareholder who is not a director is outside section 197.

The rules extending approval to persons connected with a director, in sections 200 and 201, apply only to a public company or a company associated with a public company. For an ordinary private company, a loan to a director’s spouse or adult child who holds shares therefore needs no members’ resolution under Part 10, even though that person is a member of the director’s family under section 253. A company’s objects are unrestricted unless its articles specifically restrict them (section 31), so capacity is rarely an issue.

When is a shareholder treated as a director for these rules?

Section 223 treats a shadow director as a director for the purposes of sections 197 to 214. A major shareholder who is not on the board but whose directions the directors are accustomed to follow may be a shadow director, and a loan to them would then need approval in the same way as a loan to a director. If in doubt, a members’ resolution with the memorandum required by section 197(3) and (4) costs little and removes the argument.

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What duties do the directors have when lending?

The board still has to act within its powers and for proper purposes (section 171) and promote the success of the company for the benefit of its members as a whole (section 172). A loan to one shareholder at no interest, with no security and no repayment date, benefits that shareholder at the expense of the others and of creditors. Directors should be able to show the company gets something in return, usually commercial interest and a realistic repayment plan, and should consider the company’s own cash needs and solvency before lending.

When can a loan become a disguised distribution?

Section 829 defines a distribution as every description of distribution of a company’s assets to its members, whether in cash or otherwise, subject to listed exceptions. HMRC’s Company Taxation Manual at CTM15205 summarises the case law: in Aveling Barford v Perion, a transfer at undervalue by a company with no distributable profits was an unlawful return of capital, and in Progress Property v Moorgarth the Supreme Court said the validity of a distribution depends on its purpose and substance rather than its form.

Applied to loans, a documented loan on commercial terms that the borrower is expected to repay is not a distribution. A payment labelled as a loan that nobody intends to collect, or that is released soon afterwards, can be treated in substance as a distribution to the member. If the company lacked enough distributable reserves, it would be unlawful, and section 847 makes a member who knew or had reasonable grounds for believing that liable to repay it.

What tax does a close company pay on the loan?

Section 455 of the Corporation Tax Act 2010 applies where a close company makes a loan or advances money to an individual who is a participator in the company, or an associate of a participator. A participator includes anyone who possesses share capital or voting rights (section 454), and an associate includes a relative or partner, a relative being a spouse or civil partner, parent or remoter forebear, child or remoter issue, or brother or sister (section 448). So a loan to a non director shareholder, or to a shareholder’s family member, is caught in the same way as a loan to a director.

The charge is a percentage of the loan equal to the dividend upper rate for the tax year in which the loan is made. HMRC’s guidance at CTM61505 confirms the rate was 33.75% for loans made on or after 6 April 2022 and is 35.75% from 6 April 2026. The tax is due nine months and one day after the end of the accounting period in which the loan was made, and relief is available under section 458 once the loan is repaid or released, subject to timing rules; see section 455 tax on loans and section 455 repayment claims.

Section 456 gives exceptions, but they rarely help a shareholder. Loans made in the ordinary course of a money lending business are excluded, and the £15,000 exception only covers directors and employees who work full time and do not have a material interest in the company.

Is there a benefit charge on a cheap loan?

The employment benefits code taxes cheap loans only where the loan is employment related, meaning made to an employee or a relative of an employee by the employer or a related person (sections 173 and 174 of the Income Tax (Earnings and Pensions) Act 2003). A shareholder who is neither an employee nor a relative of one falls outside that code.

For a close company, section 1064 of CTA 2010 can fill the gap. It treats expense incurred in providing benefits or facilities of any kind for a participator as a distribution, measured as the cash equivalent under Chapter 6, 7 or 10 of Part 3 of ITEPA 2003, and section 1065 excludes benefits already taxable under the employment code. Section 1069 extends section 1064 to associates of participators. So an interest free loan to a non working shareholder or family member can produce a distribution equal to the cheap loan benefit; see benefits to participators treated as distributions.

What happens if the loan is written off?

HMRC’s Savings and Investment Manual at SAIM5200 explains that when a loan within section 455 is released or written off, the company obtains relief under section 458, and the borrower is charged to income tax under sections 415 to 421 of the Income Tax (Trading and Other Income) Act 2005, with the amount treated as dividend income. On the company law side, the release is a transfer of value to a member, so it should be covered by distributable reserves and properly authorised.

How might this look in practice?

Illustration only. A close company with a 31 December year end lends £40,000 interest free on 1 June 2026 to a shareholder who holds 20% of the shares but is not a director or employee.

No members’ resolution is needed under section 197, unless the shareholder is a shadow director.
If the loan is still outstanding nine months after the year end, section 455 tax of £14,300 (35.75% of £40,000) is due on 1 October 2027.
Because the loan is interest free and the shareholder is not an employee, section 1064 may treat the cheap loan benefit as a distribution.
If the board later releases the loan, the shareholder is taxed on £40,000 as dividend income, the company reclaims the section 455 tax, and the company must check it has enough reserves to make the release lawful.

What mistakes come up most often?

Assuming the director loan rules do not apply to a shareholder who is in reality a shadow director.
Thinking section 455 only applies to directors, when it applies to any participator and their associates.
Lending with no written agreement, interest or repayment date, which makes it easier to argue the payment was a distribution.
Releasing a loan without checking reserves, or without recognising the income tax charge on the borrower.
Making the loan when the company itself is short of cash, which raises questions under the directors’ duties.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.