Where an individual borrows money for certain purposes then relief may be available on the interest on that loan. A claim is required and no relief will be given if the interest is incurred on a credit card or bank overdraft.
The legislation provides for relief on loans used for any of 7 different purposes. These are: (a) a loan to buy plant or machinery for use in a partnership, (b) a loan to buy plant or machinery for use in an employment, (c) a loan to purchase shares (or lend money to) a close company (d) a loan to purchase shares (or lend money to) an employee controlled company, (e) a loan to invest in a partnership, (f) a loan to invest in a co-op or (g) a loan to pay inheritance tax.
It is important to note that relief will only be given for interest based on a reasonable commercial rate. Therefore if the interest is artificially high or excessive then relief may not be available. Also no relief will be given if the loan was designed (or appears to be so) to likely to produce a tax advantage and seems likely to be so designed. This is an anti-abuse rule. Also no relief will be given if the loan is used in a partnership and the cash basis is being used.
The loan must be used for the this purpose first and not used for some other non-qualifying purpose and then switched. It may be used to pay for expenditure already incurred. If the loan is a mixed loan i.e. part is used for a qualifying purpose and part is not then the interest must be apportioned and only the qualifying part will obtain relief. There are rules on the repayment of mixed loans to ensure that any repayment affects both parts equally. Relief is given by the interest paid being deducted from total income. No relief is given if the interest is already treated as a trading expense.
Loan to purchase plant or machinery in a partnership. In order to qualify the equipment must be used in the partnership and it must be able to claim capital allowances on the equipment. The individual must be a partner and the interest must be due no more than 3 years after the loan is made.
Loan to purchase plant or machinery for use in an employment. Such interest will be allowed where the plant or machinery is owned by the employee and used in the employment. Capital allowances must be claimable and the interest must be payable by the employee and due within 3 years of the loan being used. Apportionment may be required if the plant or machinery is not wholly used for the employment.
Loans to purchase interest in a close company. Broadly interest on such a loan will be allowed if used to purchase ordinary shares in a close company or to lend money to such a company for use in the business. There is no relief if an EIS claim is also made. For relief to apply no capital can be received from the company other than via a loan repayment and either the full time working condition or the material holding condition must be met. The close company cannot be a close investment company.
Loans to purchase shares in an employee controlled company. An employee controlled company is a company where more than 50% of the shares are owned by the employees but the excess over 10% for employees who have more than 10% is ignored. The company must be unquoted and trading. The individual must be a full-time employee of the company and no capital can be recovered from the company other than via a loan repayment.
Loans to invest in a partnership. Interest on a loan used to purchase a share of a partnership or to lend money to such a partnership will be allowed. The individual must be a partner (not a limited partner nor via an LLP) and no capital can be recovered other than via a loan repayment.
Bear in mind that the above is only a brief overview of the legislation in this area the details should be reviewed carefully and professional advice obtained if required before any decisions are taken.
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