Director’s loan releases and income tax charges in insolvency revisited
The tax consequences of loans to participators continue to be an area of close scrutiny by HMRC, with recent consultation announcements considering enhanced reporting requirements and the rules having been the subject of a number of recent decisions at the First-tier Tribunal (FTT).
In Douglas Boulton v HMRC [2026] UKFTT 583 (TC) (Boulton), the FTT considered whether the compromise of a director’s loan as part of a liquidation settlement gave rise to an income tax charge under the rules related to the release of loans to participators in s.415 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005).
The decision follows a line of recent cases on releases and write‑offs of loans to participators, including Quillan v HMRC [2025] UKFTT 421 (TC) (Quillan) which we previously commented on. While the FTT in Quillan (which HMRC are appealing to the Upper Tribunal) found that no income tax charge arose, Boulton reached the opposite conclusion on similar facts.
Background to Boulton
Mr Boulton was the sole director and shareholder of a close company. The company’s statutory accounts and corporation tax returns recorded an overdrawn director’s loan account of £151,802.
Following the company entering creditors’ voluntary liquidation, the liquidator pursued recovery of that balance. In March 2020, a settlement agreement was entered into under which Mr Boulton agreed to pay £60,000 in full and final settlement of the outstanding balance.
Shortly afterwards, the liquidator wrote to Mr Boulton stating that the remaining balance above £60,000 was “effectively written off” and advising him to declare the amount on his next self‑assessment return. Mr Boulton did not do so. HMRC subsequently raised a discovery assessment on the basis that the unpaid balance constituted a taxable release or write‑off under s.415 ITTOIA 2005.
The Tribunal’s findings
The FTT dismissed the appeal and found that an income tax charge did arise. In doing so, it made a number of points of wider relevance:
Substance of the legal tests
Although the settlement deed itself did not expressly release the loan and contained a non‑admission clause, the FTT considered the totality of the circumstances, including the liquidator’s actions and communications after the settlement. The FTT found that the legal test was whether “as a matter of substance, the debt was written off”.
Cessation of enforcement mattered
Prior to settlement, the liquidator had actively pursued recovery. Following payment of £60,000, all recovery action ceased and the liquidator communicated clearly that the balance would no longer be pursued.
A unilateral write‑off is sufficient
The FTT rejected the argument that a formal statutory or accounting write‑off process was required. Section 415 does not prescribe any particular mechanism; an unequivocal decision by the creditor not to pursue the debt was sufficient.
On that basis, the FTT concluded that the debt had been written off such that the balance of the debt after the repayment of the £60,000 was subject to an income tax charge under s.415 ITTOIA 2005.
Why Boulton is different from Quillan
At first glance, Boulton and Quillan involve similar fact patterns: an insolvent company, an overdrawn director’s loan account and a liquidation that ends without full recovery. However, the FTT reached different conclusions in each case:
- In Quillan, the liquidator expressly stated that the loan had not been written off, and therefore retained the theoretical ability to pursue it in the future (including via restoration of the company).
- In Boulton, the liquidator took different action – affirmatively stating that the balance was “effectively written off” and taking no further enforcement steps.
The FTT in Boulton emphasised that Quillan does not establish a general rule that insolvency or non‑recovery prevents s.415 applying. Rather, the question is whether, as a matter of fact and substance, the debt has been released or written off.
It should also be noted that HMRC have appealed the decision in Quillan to the Upper Tribunal with a hearing scheduled for June 2026.
Moore Kingston Smith comment
Boulton underlines that settlements with insolvency practitioners can carry unexpected personal tax consequences and that, based on current FTT decisions, the precise wording in the insolvency practitioner’s communications alongside their underlying intentions and actions may be highly influential on whether or not an income tax charge is triggered under s.415 ITTOIA 2005.
In contrast to Quillan, where careful drafting and preservation of recovery rights proved decisive, Boulton shows that a practical end to enforcement, particularly where accompanied by clear written communication, may be sufficient to trigger s.415.
From a practical perspective:
- Participators of close companies settling loan disputes in insolvency will need to carefully consider the application of the income tax charge on releases of loans to participators where any debt is not being repaid in full; and
- The intentions of the liquidations in any settlement and the way this is communicated can potentially impact on the overall tax position.
HMRC’s continued focus on this area, together with the nuanced and fact‑sensitive case law, means director’s loan balances remain a difficult area for taxpayer, particularly in distressed or insolvency scenarios. Seeking advice early to ensure taxpayers understand their tax position is crucial.
