Claiming income tax relief on loan interest paid
You can potentially claim income tax relief on loan interest paid on monies lent to your business. This article focuses on those situations where an income tax deduction is likely to apply for an individual. It also discusses situations where income tax relief may be denied or restricted.
In order to claim income tax relief on loan interest paid, it must be for a qualifying purpose. Most importantly, all of the conditions must be met at the time the interest is paid.
The main qualifying purposes are as follows:
Buying shares in or making loans to a close company
You can buy shares in or lend money to a trading company. The company must be controlled by five or fewer people. They could be you and your fellow directors. This type of company is known as a close company.
The company can also be EEA resident, provided it would be regarded as a close company (see above) if UK resident. However, a close investment company does not qualify for relief.
If you want to claim tax relief you'll either need to work for the company or own more than 5% of the issued ordinary share capital. Additionally, you cannot claim income tax relief on a loan used to purchase Enterprise Investment Scheme qualifying shares.
If your loan to the company is partly repaid and becomes less than the amount you originally borrowed, a restriction will be applied to the interest you can claim.
Buying into or loaning capital to a trading partnership
The interest relief is claimed by the individual who borrows the money, not the partnership to which they belong. So it is not an allowable deduction when calculating the partnership’s taxable profits. Therefore it is the individual who claims a deduction from their share of profits.
The following principal conditions need to be fulfilled:
Additionally, tax relief is potentially restricted to 40% of the interest paid where a loan is made to a film partnership.
Loans to buy plant and machinery
It's possible to claim tax relief on loan interest paid on borrowings used to purchase plant and machinery provided the following applies:
The relief in these circumstances is limited to no later than 3 years after the end of the tax year in which the loan was made.
Some other points worth mentioning are as follows:
This article is intended to provide an overview on loan interest and the possible restrictions involved. For detailed guidance of how this may apply in your own personal circumstances, please contact us for further information.
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