UK and International Tax news
FTT Hears Appeal In Close Company Loan Novation Case
Friday 28th November 2025
The FTT has heard the taxpayer’s appeal in a case involving the tax treatment of the novation of a director’s loan account to a parent company.
In N Powell v HMRC [2025 UK FTT 528], the taxpayer was a director and sole shareholder of Thermoline Ltd (T) which entered into a reorganisation with Property Holding SW Ltd (PH) in 2020 via a share for share exchange, whereby PH became the holding company of T, and the taxpayer became a director of PH.
T had incurred expenditure on behalf of and/or advanced sums to the taxpayer as a result of which the director’s loan account became overdrawn. Further indebtedness arose after the reorganisation with the sum outstanding increasing to £512,713 on 31 December 2020. T was liable to a charge to corporation tax under s.455 CTA 2010 in respect of the overdrawn director’s loan account.
In March 2021 the taxpayer, T and PH entered, by way of deed, a novation of the sums outstanding on the director’s loan account. The novation itself was deemed to take effect on 31 December 2020 and the taxpayer continued to have a liability in respect of the sums owed to PH rather than T.
T claimed and was granted relief in respect of the s.455 charge under s.458 as regards the balance to 31 March 2020 and the tax was repaid on 9 November 2022. HMRC accepted that no tax fell due in respect of the sums advanced in the period from 31 March 2020 to 31 December 2020 on the basis that in consequence of the novation, the sums so advanced had been released by T on 31 December 2020, within nine months of the year end.
HMRC concluded that the taxpayer was liable to a charge to income tax arising under s.415 ITTOIA 2005 on a deemed payment of a dividend of £512,713 from T with income tax due of £194,580.
The parties agreed that the principal authority for the FTT to apply when determining the appeal was that of Collins v Addies (Inspector of Taxes) [1992] STC 746. From Collins, the FTT held that where a debtor is released from a debt as the natural
and ordinary consequence of having repaid or satisfied the debt, section 415 ITTOIA will not apply.
The FTT considered the terms of the novation and accepted the contractual effect thereof with valuable consideration provided both for the acquisition of the rights and obligations under the loan and relating to the debt by PH from T and for the release of the taxpayer from its indebtedness to T, such that PH was substituted as lender to the taxpayer.
From a contractual perspective the FTT was satisfied that PH’s obligation to pay as reflected by the inter-company loan account represented valuable consideration for the creditor to creditor novation and PH’s acceptance of all rights and obligations under the loan as valuable consideration acceptable to T for the release of the taxpayer.
The FTT went on to comment that accepting the contractual analysis did not determine the taxing outcome. On further analysis, however, the FTT held that the release by T was a taxable release. PH acquired the liability and, in consequence of the liability being outstanding on an inter-company loan account, PH became indebted to T. Such indebtedness was associated to that from which the taxpayer was released. The overall result meant that the taxpayer was taxed on the release of the loan from T, but still owed the outstanding loan amount but to PH.
It is noted however that the overall effect may have been different had PH simply paid off the loan owed by the taxpayer. There would have been no liability under s.415. A new s.455 liability would have arisen in PH.
Leave to apply to appeal the decision was granted.
If you would like more detail on the above decision, please contact Keith Rushen on 0207 486 2378.
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