A close company is a limited company that meets either of two conditions: it is controlled by five or fewer participators (such as shareholders), or by any number of participators who are also directors; or, if the company were wound up, more than half its assets would be distributed among five or fewer participators. This applies regardless of the company’s size or trading activity.
Many owner-managed businesses meet the legal definition, including most one- or two-founder structures built as a private company limited by shares. HMRC has introduced new mandatory disclosures that directors must make on their tax returns related to interests in close companies.
- Close company status hinges on control by five or fewer participators (or by director-participators), regardless of company size, and relatives' holdings are added to each person's total.
- Loans to participators trigger a temporary section 455 charge, rising to 35.75% from 6 April 2026, with refunds only claimable long after repayment.
- From the 2025/26 return, directors already in Self Assessment must name each close company, its registration number, dividends and peak shareholding — even where these are zero.
- A wound-down trading company sitting on cash can become a close investment-holding company and lose the lower Corporation Tax rate.
How the Law Defines a Close Company
The two conditions needed to be a close company are set in section 439 of the Corporation Tax Act 2010. One relates to who controls the company and the other to who would receive its assets if it were wound up. Meeting either is enough for a company to be a close company.
| Condition | The question it asks |
|---|---|
| Control | Is the company under the control of five or fewer participators, or participators who are directors, however many there are? |
| Winding up | Would five or fewer participators, or participators who are directors, have rights, or can acquire the rights, to receive more than half the assets if the company is wound up? |
Under section 450, control means the ability to exercise or acquire control over a company’s operations through ownership of the majority of its share capital or voting rights, entitlement to the majority of its income, or to the majority of its assets if wound up.
The attribution of rights rule under section 451 aggregates a participator’s interests with those of any associates and section 448 defines who these associates are, such as relatives or business partners.
Who counts as a participator
At the centre of both conditions are participators, which section 454 broadly defines as a person “having a share or interest in the capital or income of the company”. Under UK law, a person can be an individual, company, partnership or trust, but in a small company that usually means the shareholders.
Section 454(2) characterises participators as:
- anyone who owns shares or voting rights in the company or has the right to acquire them
- anyone who has lent money to the company, with the exception of banks carrying out normal business
- anyone who is entitled to receive a share of the company’s profits or other distributions, or to receive payments from the company when a loan is repaid, including any additional amount paid on top of the original loan
- anyone who has the right to acquire an entitlement to receive the company’s profits, distributions or other payments described above
- anyone who has the right to ensure that the company’s income or assets, whether it currently holds them or acquires them in the future, are used directly or indirectly for their benefit
How to Check Whether Your Company is a Close Company
Working through these steps in order can identify if a company is close:
- Check which entities the Corporation Tax Act 2010 exempts from classification as a close company.
- Identify all participators by listing any person with shares, voting rights or a claim on the company’s income or assets.
- Add the holdings of associates, such as close relatives, to each person’s total.
- Apply the control test of whether five or fewer participators control the company.
- Apply the same test to participators who are directors, however many there are.
- Apply the winding-up test to the same groups.
A company with one shareholder-director, or a few family shareholders, will almost always be close. The definition becomes more complex where corporate shareholders, trusts and layered groups are involved. HMRC’s Company Taxation Manual outlines the broad definition and sets out the detailed tests.
Which Companies are not Close
Sections 442 to 447 of the Act list exceptions where specific companies are not defined as close, even where five or fewer people hold the shares:
- Non-UK resident companies, registered societies and building societies.
- Companies controlled by or on behalf of the Crown.
- Companies controlled by non-close companies, where the company could only count as close by treating a non-close parent as one of the five participators.
- Quoted companies where at least 35% of voting rights are publicly held, their shares have traded on a recognised stock exchange in the past 12 months, and up to five principal members hold no more than 85% of votes.
What Close Company Status Changes in Practice
Close companies are subject to anti-avoidance rules, specifically affecting three areas:
Loans to participators
Section 455 imposes a temporary Corporation Tax charge when a close company makes a loan to a participator, which the company can claim back once the loan is repaid or written off.
HMRC is likely to scrutinise directors’ loans repaid shortly before the deadline and re-borrowed quickly afterwards. There are anti-avoidance rules where tax relief may be denied, including where loans of £5,000 or more are repaid and new loans of £5,000 or more taken out within 30 days in a later accounting period.
Relief may also be denied where the loans total £15,000 or more immediately before repayment, and it is clear the intention was to replace the repaid funds with a new loan or loans totalling £5,000 or more. No time limit applies.
Section 455 rates and deadlines
The current rules that apply to the section 455 charge are:
| Item | Current position |
|---|---|
| Loan charge rate | 25% for loans made before 6 April 2016 |
| 32.5% for loans made between 6 April 2016 and 5 April 2022 | |
| 33.75% for loans made between 6 April 2022 and 5 April 2026 | |
| 35.75% for loans made on or after 6 April 2026 | |
| When the charge falls due | Nine months and one day after the accounting period ends – if repaid before, no section 455 tax is payable. The company must use form CT600A when filing its tax return to record the amount owed at the end of the accounting period. |
| Time limit to reclaim | Four years from the end of the financial year the repayment or write-off occurs |
If a company has a 31 March year-end and a director borrows £20,000 on or after 6 April 2026, the following amounts and timings would apply using the current rate:
| Event | Amount or Date |
|---|---|
| Director’s loan outstanding at 31 March 2027 | £20,000 |
| Section 455 tax charge at 35.75% | £7,150 |
| Payment due to HMRC | 1 January 2028 |
| Loan is repaid in June 2028 | £20,000 |
| Earliest date the company can reclaim tax | 1 January 2030 |
| Section 455 tax refund | £7,150 |
Benefits to participators
Section 1064 sets rules for a close company giving untaxed personal benefits to a participator or their associates. These may include personal accommodation, entertainment, domestic services, company assets made available for personal use, or other benefits paid for by the company that are not taxed as employment income.
The taxable cash equivalent of the benefit is treated as a dividend for the individual’s income tax, depending on whether the benefit is connected to the participator’s employment or status as a director, or if they have repaid part of the cost. This does not apply to benefits in kind which are taxed on the payroll and reported on a P11D.
Close investment-holding companies
A close investment-holding company (CIHC) is a close company that makes money through passive investments rather than active trading. Under section 18N, all close companies are treated as a CIHC unless they exist wholly or mainly to:
- trade commercially
- let property or land commercially to people who are not connected to the company and not to a connected person’s spouse or civil partner or these people’s relatives and their spouses or civil partners
- hold shares, securities or make loans to qualifying subsidiaries that trade commercially or let property commercially
- coordinate the administration of a group of qualifying companies
CIHCs cannot use the lower Corporation Tax rate, but pay the flat main rate on all profit from each whole accounting period. The test applies to each accounting period separately, so a trading company that winds down but keeps a large cash balance can become a CIHC. The exception here is that a company in formal liquidation is not a CIHC in the first accounting period of the winding up if it was not one in the period before.
Self Assessment for Directors: What Goes on the Return
Director Self Assessment has changed, with a new regulation introduced in 2025 requiring anyone who already files a personal return to declare whether they were a company director during the tax year, even if the close company was dormant or they were unpaid. There is an exception if unpaid directorships were with a charity or community interest company.
The first tax return affected by the new regulation is for 2025/26, which must be filed by 31 October 2026 on paper or by 31 January 2027 online.
If they were a director, they must say whether any of those companies were close and provide the following details for each close company:
- the company’s name
- the company’s registered number
- the dividends received from it, even if zero (dividends are subject to different tax rates and allowances)
- the highest percentage of shareholding held during the year, even if zero
These answers sit on the SA102 employment pages, in boxes 6 to 7.4. HMRC provides useful notes to help complete the tax return to meet the new regulation. Helpful tips include:
- the shareholding percentage in box 7.4 is calculated using the nominal value of the shares
- box 6.1 must include the end date of any directorship that ended before 6 April 2026
- box 7.2 requires the company registration number issued by Companies House when the company was formed
The SA102 form page tells directors to use an employment page for each employment or directorship. The regulation applies to limited company owners and directors registered for Self Assessment already.
Outside these requirements on Self Assessment for directors, HMRC’s core Self Assessment deadlines and filing dates have not changed.
Close Company FAQs
Is a one-person limited company a close company?
In most cases, as a sole shareholder is a participator and meets the test of there being five or fewer. The only exceptions are if the company meets any of the exclusions detailed above under Which Companies are not Close.
Does a larger company escape close company status?
No, a UK company of any size is close if five or fewer participators control it, or if its directors do
Must every director of a close company file a tax return?
No, the regulation applies to people who must already file under Self Assessment. GOV.UK explains who must send a tax return, including partners and people with untaxed income such as dividends.
What do I enter on my tax return if I hold no shares?
The questions must still be answered on a director’s tax return, even if the dividend figure and the shareholding percentage are zero.
Does a company register as close with Companies House?
No, as close status is a tax position and follows from how the company is owned and controlled.
Can a company stop being close?
Yes, a company stops being close when it no longer meets the statutory tests needed to be a close company. This means control must pass to more than five participators, the directors must not control the company, and five or fewer participators or any number of directors would no longer be entitled to more than half of the company’s assets upon winding up. Company status can change when shareholders join or leave, there is a new investor, or shares transfer within a family or a corporate parent.
