Introduction to Close Companies Flashcards
(11 cards)
What defines a close company?
A) A company listed on the London Stock Exchange
B) A company controlled by five or fewer participators
C) A company operating outside the UK
D) A non-close company owning a subsidiary
B – A company controlled by five or fewer participators
Explanation: A close company is one controlled by five or fewer participators or any number of participators who are also directors.
Which of the following would be treated as a participator?
A) Employee with no shareholding
B) Customer buying goods
C) Employee receiving only salary
D) Creditor with a beneficial interest in company income
D – Creditor with a beneficial interest in company income
Explanation: Participators include creditors who have a share or beneficial interest in the company’s income or capital.
What happens if a loan made by a close company to a participator is written off?
A) It is ignored for tax purposes
B) It is treated as a dividend received by the participator
C) It becomes corporation tax deductible for the company
D) It is taxed as capital gains for the participator
B – It is treated as a dividend received by the participator
Explanation: The loan is treated as if the participator received a dividend and is taxed as income.
Which of the following companies would not be classified as a close company?
A) A small family-run business owned by three siblings
B) A private company owned equally by six directors
C) A company whose shares are publicly traded
D) A company owned entirely by one other close company
C – A company whose shares are publicly traded
Explanation: A company listed on a recognised stock exchange is excluded from the definition of a close company.
Alpha Ltd has five shareholders, none related, each holding 20 percent. Is it a close company?
A) Yes, because it is controlled by five participators
B) No, because control is split equally
C) Yes, because it has more than two directors
D) No, because it is listed on a recognised stock exchange
A – Yes, because it is controlled by five participators
Explanation: Five or fewer participators controlling the company means it is a close company, even if ownership is equal.
Beta Ltd gives a loan of £10,000 to its full-time employee, who owns no shares. Which rule correctly applies?
A) Company must pay tax on the loan amount
B) Loan is taxed immediately as dividend income
C) Loan is treated as a chargeable gain
D) No tax charge because employee has no material interest
D – No tax charge because employee has no material interest
Explanation: Loans under £15,000 to full-time employees with no material interest are exempt from tax under close company loan rules.
Zeta Ltd has distributable profits but winds up to distribute them as capital. Which rule applies?
A) Loan to participator rules
B) Straddling rules
C) Transactions in securities rules
D) IHT anti-avoidance rules
C – Transactions in securities rules
Explanation: Changing income into capital to reduce tax triggers the transactions in securities rules.
A close company gives a shareholder free use of a company flat. How is this treated?
A) Employment income
B) Distribution
C) Capital gain
D) Loan
B – Distribution
Explanation: Non-employment benefits to participators are treated as distributions for tax purposes.
Gamma Ltd lends £25,000 to a participator who is also a full-time employee with a 3 percent shareholding. What is the tax position?
A) Company must pay corporation tax on the loan
B) No tax as loan is small and employee works full time
C) Taxed immediately as income for the participator
D) Loan is treated as a capital gain
A – Company must pay corporation tax on the loan
Explanation: Loan exceeds £15,000 so the small loan exemption does not apply; the company must pay tax.
A company transfers assets worth £100,000 to a shareholder. What is the Inheritance Tax impact under close company rules?
A) The gift value is apportioned to shareholders for IHT
B) The transfer is treated as a loan
C) No impact unless the shareholder dies
D) The company pays inheritance tax directly
A – The gift value is apportioned to shareholders for IHT
Explanation: Transfers of value by a close company are apportioned to shareholders for inheritance tax purposes.
A small private company is owned by six people: two individuals and four non-close companies. Is it a close company?
A) Yes, because there are individuals
B) No, because non-close companies are involved
C) Yes, because six participators own it
D) No, because it is more than five owners
D – No, because it is more than five owners
Explanation: If control is spread among more than five participators and not consolidated among five or fewer, it is not a close company.
