Taking an Interest – Tax Relief on Interest on Qualifying Loans

Certain taxpayer expenditure can qualify for tax relief, and these amounts are known as deductible payments.

The payments are deducted from income when calculating taxable income, effectively saving tax at a taxpayer’s marginal rate. For example, if a taxpayer pays tax at a marginal rate of 40%, they will  have saved 40p for every £1 of the payment they pay in the tax year.

Interest paid on qualifying loans is a deductible payment, however there is a cap on the amount that may be relieved each tax year.  The total amount which can be deducted is the greater of £50,000 or 25% of adjusted total income (being total income less payroll giving and gross pension contributions paid).

Qualifying Interest

Where a loan is a qualifying loan, there is no limit on the amount that qualifies for tax relief. Interest is paid gross, and may be applied as a deductible payment up to the limits detailed above.

The types of loan that qualify include:

1. Loans taken out by an employee to purchase plant and machinery for use in their employment (relief is limited to interest paid in the tax year of the loan, and the following 3 tax years).
2. Loans taken out by an individual to purchase shares in a “close” company (being a UK company controlled by 5 or fewer shareholders).
3. Loans taken out to provide funds to a “close” company for use in the business, where the individual is a shareholder and works for the company, or holds more than 5% of the share capital.
4. Loans taken out by an individual to buy into a partnership e.g. where an employee is invited to become a partner, a capital contribution is often required.

Each loan is subject to additional conditions in order to qualify, however loans of the above nature are normally eligible for relief.

Relief for Property Letting Companies 

Regarding loans taken out to acquire shares in, or provide funds to a “close” company (loans 2. and 3. above), it is worthwhile noting that the relief will not only apply to trading companies, but also to companies that invest in land and property, where it is intended that the land/property will be let on a “commercial basis”.

The land/property will be let on a commercial basis where it is not let to a connected person (being someone who has control over the company), their spouse/civil partner, or any of the connected person’s/spouse’s/civil partner’s relatives, or spouses/civil partners of those relatives.

If you require advice on qualifying loans for, please contact us.

Limit on Income Tax Reliefs – FA 2013 (16 October 2013)