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.

tax relief on loan interest

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: 

  • Throughout the period from the use of the loan until the interest is paid you must have been a member of the partnership concerned. However, there is no relief due for loans made by members of either a limited partnership or an investment LLP. 
  • You have not recovered any capital from the partnership, apart from those amounts treated as capital repayments of the original loan.

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 plant and machinery is used for the purposes of an office or employment held by an individual in the tax year
  • The plant or machinery belongs to the individual, and
  • The individual is entitled to capital allowances or liable to a balancing charge for the tax year concerned.

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.

Additional points

Some other points worth mentioning are as follows:

  • If your business uses the cash basis for accounting then tax relief on loan interest paid is limited to £500 per annum.
  • If you retire from a partnership your loan will no longer qualify for relief.
  • There is an overall cap (£50,000 or 25% of adjusted total income) which applies to all loan interest relief claims made as deduction

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.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at richard@tfaaccountants.co.uk.

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