A director’s loan transferred between companies can still trigger an income tax charge if the original debt is released rather than repaid. In Nicholas Powell v The Commissioners for HMRC [2026] UKUT 418 (TCC), the Upper Tribunal confirmed that moving a loan obligation to a new creditor did not amount to repayment under the relevant tax legislation.
What did the Upper Tribunal decide?
In a judgment handed down on 28 October 2026, Judge Thomas Scott and Judge Guy Brannan dismissed Mr Powell’s appeal against the First-tier Tribunal’s decision. The dispute concerned section 415 of the Income Tax (Trading and Other Income) Act 2005, which charges income tax where a close company releases or writes off a loan made to a participator and the company was or is chargeable under section 455 of the Corporation Tax Act 2010.
HMRC had concluded that Mr Powell was liable to income tax on a deemed dividend of £512,713.89 following the transfer of his outstanding director’s loan from Thermoline Limited to Property Holding SW Limited (PHSW). The amendment to his 2020/21 tax return was £194,580.60. The central question was whether the transaction constituted a “release” of the loan or repayment in a form that avoided the charge.
How did the loan arrangement work?
Mr Powell was a director and, before a share-for-share exchange in July 2020, the sole shareholder of Thermoline, a close company. Thermoline had advanced money to him and incurred expenditure on his behalf. The outstanding director’s loan balance stood at £309,338 on 31 March 2020 and rose to £512,713.89 by 31 December 2020.
A deed signed on 16 March 2021 was treated as taking effect from 31 December 2020. Under it, Thermoline released Mr Powell from his obligations to repay the loan to Thermoline, while PHSW became the creditor and Mr Powell remained liable to repay an equivalent amount to PHSW. PHSW, in turn, recorded an inter-company debt of £512,713.89 owed to Thermoline.
- The director’s loan account showed an outstanding balance of £309,338.
- The loan balance stood at £512,713.89 and was the effective date of the novation.
- Thermoline, PHSW and Mr Powell executed the novation deed.
- HMRC issued a closure notice assessing the income tax charge.
- The Upper Tribunal dismissed Mr Powell’s appeal.
Why was the novation treated as a release?
The Tribunal relied on Collins v Addies, which established that a release is not limited to a gratuitous transaction or one made for less than full value. A release may fall within the legislation even if the company receives valuable consideration. The key distinction is between releasing a debt and actually repaying it.
Repayment may occur where the company receives money, payment by a third party, or something equivalent in value that satisfies the debt. But a novation that extinguishes one debt and substitutes another does not, by itself, enable the company to recover its money. The Tribunal held that the inter-company debt owed by PHSW to Thermoline was a replacement obligation, not repayment of Mr Powell’s original loan.
The fact that this case involved a substitution of creditor, rather than the substitution of debtor considered in Collins, did not change the outcome. The relevant features remained that Mr Powell’s debt to Thermoline had been released by novation and had not been repaid.
Did Mr Powell need to receive an economic benefit?
Mr Powell argued that the purpose of section 415 was to tax value extracted by a participator from a close company in a non-dividend form, and that he had obtained no economic benefit because he remained liable for the same amount to PHSW. The Tribunal acknowledged that the argument raised a concern, but concluded that it could not depart from the binding approach in Collins.
Under that authority, the focus is on whether the participator’s legal obligation to the original company has been released and whether the company has recovered its money. It is not necessary to show that the release was gratuitous or that the participator obtained a net economic benefit from the wider arrangements. The provision of valuable consideration therefore did not prevent the transaction from being a release for section 415 purposes.
What does the ruling mean for taxpayers?
The decision is a reminder that intra-group restructurings and director-loan reorganisations must be assessed by their legal effect, not simply by their commercial description or the fact that an equivalent liability continues elsewhere. Transferring a loan to another company may not count as repayment where the original creditor’s rights against the director are extinguished and a replacement debt is created.
Companies and their advisers should review the wording and tax consequences of any proposed novation before it is implemented. Section 415 may apply even where the parties provide valuable consideration, and a close company’s potential relief under section 458 does not itself determine whether the participator is liable to income tax.
The Upper Tribunal acknowledged that a realistic view of the arrangements as a whole could raise questions, but said it was bound by the Court of Appeal’s decision in Collins. It therefore upheld the First-tier Tribunal’s conclusion and dismissed the appeal.
Frequently asked questions
What was the main issue in Nicholas Powell v HMRC?
The issue was whether transferring a director’s loan from Thermoline to PHSW by novation amounted to a release of the debt under section 415 ITTOIA 2005 or a repayment that would avoid the income tax charge.
How much was the loan involved in the case?
The outstanding loan balance was £512,713.89. HMRC amended Mr Powell’s 2020/21 tax return by £194,580.60.
Why did the Upper Tribunal dismiss the appeal?
Applying the binding principles in Collins v Addies, the Tribunal found that the novation released the original debt without repaying it. Valuable consideration and the substitution of a new creditor did not change that analysis.
Does a release have to be gratuitous to trigger section 415?
No. The Tribunal held that a release can fall within section 415 even where valuable consideration is provided. The key distinction is whether the debt has actually been repaid or has instead been released and replaced by another obligation.