Reclaiming section 455 tax paid

If you’re a director or shareholder of a close company and you’ve paid section 455 tax, you might be entitled to claim it back. This is a genuine relief that many businesses overlook, potentially leaving money on the table. In this post, we’ll walk you through what section 455 tax is, when you can reclaim it, and the practical steps to take.

What is Section 455 Tax?

Section 455 of the Corporation Tax Act 2010 imposes a tax on certain loans made by close companies to their directors or shareholders. When a close company (broadly, one controlled by five or fewer participators) advances money to a director or shareholder, corporation tax of 32.5% is levied on that loan amount. This isn’t a permanent tax—it’s designed to discourage directors from extracting value from the company in the form of loans rather than dividends.

The good news is that this tax is recoverable, provided certain conditions are met. Understanding when and how to claim repayment can make a significant difference to your cash flow.

When Can You Reclaim Section 455 Tax?

Section 455 tax becomes recoverable in the following circumstances:

When the Loan is Repaid The most straightforward route is when the director or shareholder repays the loan in full. Once the funds return to the company, you can claim back the 32.5% tax that was paid. HMRC must receive your claim within four years from the end of the accounting period in which the loan was made (though you can amend returns within 12 months of the filing deadline).

On the Death of the Shareholder If the director or shareholder who received the loan passes away, the section 455 tax is automatically cancelled. There’s no need to claim; HMRC will adjust records accordingly once notification is received.

If the Shareholder Ceases to be a Participator Where the shareholder no longer holds shares in the company (for example, following a sale of their shareholding), the tax is recoverable. Documentation evidencing the disposal will support your claim.

When the Loan Becomes a Distribution If the loan is formally written off or released and treated as a distribution (dividend), the section 455 tax is cancelled. However, this triggers alternative tax consequences—the amount written off is treated as a dividend, subject to dividend tax in the shareholder’s hands. This option requires careful consideration with your accountant.

How to Claim Section 455 Relief

Step One: Ensure Conditions Are Met Before submitting a claim, verify that the loan has genuinely been repaid (or one of the other qualifying events has occurred). Repayment must be to the company itself, not to a connected third party.

Step Two: Gather Documentation Assemble evidence of repayment: bank statements, loan agreements, board minutes authorising the loan, and evidence of the original section 455 computation. If the shareholder has died or sold their shares, retain death certificates or share transfer documentation.

Step Three: File Your Claim Claims can be submitted via your company tax return (Corporation Tax Return, form CT600) when you next file. Alternatively, you can submit a separate claim to HMRC using form CT115 (Application for Relief) or a written request. Include a clear explanation of the loan, the date of repayment, and the amount of section 455 tax originally paid. Many firms use their accountant to manage this process.

Step Four: Allow Time for Processing HMRC typically processes relief claims within 4–6 weeks, though complex cases may take longer. Once approved, the tax is repaid to the company’s bank account.

Common Pitfalls to Avoid

Don’t delay in submitting your claim—the four-year window closes quickly. Ensure documentation is complete and dated accurately. Some businesses mistakenly believe that partial repayment entitles them to a proportionate relief; this isn’t correct. The relief applies only when the outstanding loan balance reaches zero (or qualifies under another ground).

Also, be aware that section 455 tax is separate from dividend tax. Writing off a loan creates a distribution, and the director may face dividend tax; this isn’t an ideal route unless discussed with your advisor.

Final Thoughts

Section 455 relief is a valuable recovery mechanism when loans to directors are repaid. The 32.5% rate represents a meaningful amount, especially for larger loans. If your close company has advanced funds to directors or shareholders in previous years and those loans have since been repaid, it’s worth reviewing whether you’ve claimed relief.

For tailored advice, contact Severn Accounting — we’re here to help.