What is a close company

Q: What mistakes do people make with the test?

Reading only the share register. Options, nominee holdings, family trusts and holding companies all feed into the count through sections 450 and 451. Treating "five" as a cap on shareholders. A company with hundreds of members is close if five of them, with attributions, have control, or if directors control it. Forgetting the winding up test. A company can escape Condition A but still be close under Condition B, which is tested both with and without loan creditor rights. Assuming a group subsidiary is open. The section 444 exception only applies if the controlling companies are themselves not close. A subsidiary of a close holding company is close. Testing once and never again. Close status is a question of fact at each relevant time. Section 455, for example, applies only if the company is close when the loan is made (CTM61505).

A UK resident company is close if it is controlled by five or fewer participators, or by participators of any number who are directors, or if five or fewer participators or director participators would take the greater part of its assets on a winding up. The test lives in section 439 of the Corporation Tax Act 2010, and it is applied after attributing to each participator the rights of their associates, nominees and controlled companies, which is why almost every owner managed company is close.

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What does the legislation actually say?

Section 439 of the Corporation Tax Act 2010 (CTA 2010) defines a close company as one that meets either of two conditions.

Condition A is that the company is under the control of five or fewer participators, or of participators who are directors.
Condition B is that five or fewer participators, or participators who are directors, together possess or are entitled to acquire rights that would give them the greater part of the assets available for distribution among the participators if the company were wound up.

Condition B is run twice: once counting rights held as a loan creditor and once disregarding them. Meeting it on either basis is enough. Sections 442 to 447 then take certain companies out of the definition, whatever their ownership. This page explains the mechanics of those tests. For what follows once a company is close, see the overview of close company rules.

How is control measured?

Control has a statutory meaning in section 450. A person has control of a company if they exercise, are able to exercise or are entitled to acquire direct or indirect control over its affairs. Section 450(3) lists four specific ways of having control. A person controls the company if they possess or are entitled to acquire:

the greater part of the share capital or issued share capital;
the greater part of the voting power;
enough issued share capital to receive the greater part of the income if all of it were distributed among the participators (ignoring loan creditor rights for this purpose); or
rights to the greater part of the assets available for distribution among the participators on a winding up or in any other circumstances.

If two or more persons together satisfy any of these tests, they are treated as having control together. HMRC’s Company Taxation Manual at CTM60240 says that in most cases the answer comes from looking at who holds the issued share capital or the voting power, and the other tests are only needed where those fail. The income test is mainly relevant where non voting shares carry a high dividend entitlement, and the assets test where loan creditors or special winding up rights exist.

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Whose rights are added to a participator’s own?

The test is not applied to bare share registers. Section 451 attributes to a person:

rights or powers held by someone else on their behalf, or which someone else can be required to exercise at their direction (nominees);
all the rights and powers of their associates, such as close relatives, business partners and certain trustees; and
the rights and powers of any company that the person controls, alone or with associates.

Rights of an associate’s associates are not added (section 451(5)). Section 451(6) then directs that attributions are made in whatever way results in the company being treated as controlled by five or fewer participators, if that is possible. The test is deliberately one sided. Who counts as an associate is covered in detail in participators and associates in close companies.

How does the director limb work?

A company is also close if it is controlled by participators who are directors, however many of them there are. A company with twelve shareholders who are all on the board is close under this limb even though no five of them hold a majority.

Section 452 gives “director” a wide meaning for this purpose. It includes anyone occupying the position of director by whatever name called, anyone whose directions or instructions the directors are accustomed to follow, and a manager or person concerned in the management of the business who owns or controls at least 20% of the ordinary share capital, counting what their associates own or control. A senior manager holding 20% with their spouse is therefore a director for the close company test even if they have never been appointed. See shadow and de facto directors for the company law side of the same idea.

What is the winding up test and why does it exist?

Condition B was introduced so that companies cannot escape close status by structuring voting and share rights cleverly. Section 440 sets out a notional winding up. Where a participator is itself a company, that company is treated as also being wound up and its share passed through to its own participators, and so on until the assets reach individuals. HMRC calls this “looking through” corporate participators. The exception is a company holding its rights in a fiduciary or representative capacity, which stands alongside the individuals (section 441(3)).

Which companies can never be close?

Some companies are excluded outright and some are excluded only if conditions are met.

Exception	Where in CTA 2010	What it requires
Non UK resident companies	Section 442(a)	Excluded regardless of ownership. A UK branch of an overseas company is therefore outside the close company rules (CTM60105).
Registered societies and building societies	Section 442(b) and (c)	Excluded regardless of ownership.
Crown controlled companies	Section 443	Not close under Condition A if controlled by or on behalf of the Crown independently of others.
Companies controlled by open companies	Section 444(2)	Controlled by one or more companies that are not close, and only close if a non close company is counted as one of the five or fewer participators.
Open company loan creditors	Section 444(3)	Close only because of the assets tests, and would not be close if loan creditors that are non close companies were ignored.
Quoted companies with public float	Sections 446 and 447	Shares carrying at least 35% of the voting power held by the public, dealt in and listed on a recognised stock exchange within the last 12 months, and principal members holding no more than 85% of the votes.

For the quoted company exception, a principal member is someone with more than 5% of the voting power, limited to the five largest holders. Shares held by directors, their associates, companies they control and associated companies do not count as held by the public.

How does the test work in practice?

HMRC’s own examples at CTM60420 show how attribution decides the answer. In one, A holds 280 voting shares, his wife 100, his brother 10, the trustees of a settlement he made 40, and a company he controls 80, out of 1,000 votes. Attributing his associates’ and his company’s votes gives A 510, a majority, so the company is close and controlled by one person.

Illustration only. Bright Ltd has 100 ordinary shares, one vote each, held by eight unrelated individuals: four hold 15 shares each, and four hold 10 each. None is a director except the four 15 share holders, who sit on the board.

Five or fewer participators: the four largest holders have 60 shares between them, which is the greater part, so Condition A is met already.
Even without that, the four directors together hold 60 votes, so the director limb would also be satisfied.

Now suppose instead that Bright Ltd has 20 unrelated shareholders with 5 shares each and only one director. No five hold more than 25 shares, and the directors hold 5. Unless associates, nominees, options or special rights change the picture, the company is not close. Family relationships can change the outcome. If nine of those shareholders were the parents, children or siblings of a tenth, that tenth would have 50 shares attributed, and adding any one other holder gives 55, so two participators would control the company and it would be close.

What mistakes do people make with the test?

Reading only the share register. Options, nominee holdings, family trusts and holding companies all feed into the count through sections 450 and 451.
Treating “five” as a cap on shareholders. A company with hundreds of members is close if five of them, with attributions, have control, or if directors control it.
Forgetting the winding up test. A company can escape Condition A but still be close under Condition B, which is tested both with and without loan creditor rights.
Assuming a group subsidiary is open. The section 444 exception only applies if the controlling companies are themselves not close. A subsidiary of a close holding company is close.
Testing once and never again. Close status is a question of fact at each relevant time. Section 455, for example, applies only if the company is close when the loan is made (CTM61505).

Why does close company status make a difference?

Being close carries no tax charge by itself. HMRC’s manual at CTM60070 lists the consequences: an extended meaning of distribution for benefits provided to participators, a charge on loans to participators, and restrictions for close investment holding companies. In practice the main ones for owner managed businesses are s455 tax on overdrawn director’s loans, the treatment of benefits to participators as distributions, and the higher rate for close investment holding companies. The separate test for associated companies also borrows the same control definition.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.