HS340 Qualifying loans and alternative finance arrangements

simon

Simon Misiewicz

9th January 2019

Article relevant to the tax year 2018/19.

Do you have business loans or alternative finance arrangements?

Want to know how to claim tax relief?

As shown by HMRC website, it is possible to get tax relief on loan interest that is incurred for business purposes.

You may be able to claim tax relief for loan interest paid. This also applies to alternative finance interest payments.

Interest may be tax deductible where the loan or alternative finance arrangement is used to:

  • Buy ordinary shares in, or lend money to, a close company. This is where you own more than 5% of the ordinary share capital.
  • Buy ordinary shares in, or lend money to, a close company. When you own any part of the share capital and work for the greater part of your time in the business
  • Acquire ordinary share capital in an employee controlled company. This applies if you are a full-time employee. A full-time employee is when you work for the greater part of your time as a director or employee.

You must also…

  • Acquire an interest in a trading or professional partnership including a Limited Liability Partnership (LLP). Provided it was constituted under the LLP Act 2000, other than an investment LLP.
  • To provide a partnership, including an LLP with funds by way of capital or premium. It could also include advancing money. The money wholly for the partnership’s business
  • Buy equipment or machinery for use in your work for your employer, or by a partnership (unless you have already deducted the interest as a business expense). Relief is only available if you, or the partnership, were entitled to claim capital allowances on the item(s) in question. Only the business proportion of the loan interest or alternative finance payments qualifies for relief if the assets is only partially used in the business.
  • You should enter interest on loans and alternative finance payments, under an alternative finance arrangement to buy or improve rental properties, on the UK property pages.

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Please note:

You cannot claim relief for interest on overdrafts or credit cards. Ensure that you get (and keep) from your lender a certificate of interest. You will also need receipts for the alternative finance payments you have paid during the year.

Tax relief is restricted when you are claiming income tax relief on the interest. The limit on Income Tax reliefs restricts the total amount of qualifying loan interest relief and certain other reliefs in each year to the greater of £50,000 and 25% of ‘adjusted total income’.

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HS340 Qualifying Loan Example 1

Phil has a total income of £70,000 in 2017 to 2018 and makes a trading loss in that year on one of his businesses of £60,000.

The maximum amount of relief Phil can set against his total income for 2017 to 2018 is £50,000 as this is the greater of £50,000 and 25% of his income. The remaining £10,000 loss can be carried forward.

Order of reliefs

As shown by HMRCs website, loan interest losses is restricted. Where the total of losses and loan interest payments exceeds the limit, it can be beneficial to have the maximum possible loan interest payments set against income in the given tax year. This is because these payments can’t be carried forward or back and they would otherwise be lost.

HS340 Qualifying Loan Example 2

Paul has a total income of £90,000. His share of partnership trading losses is £49,000. He has also paid £6,000 interest on a business loan.

Only £50,000 of his combined losses and loan interest can be used to reduce his taxable income.

Paul therefore specifies that the full £6,000 loan interest is to be relieved first. Only £44,000 of his partnership trading loss is then used. The remaining £5,000 of these losses is carried forward to set against partnership profits.

Had he specified that the £49,000 partnership trading losses is relieved first he could only have used £1,000 of the loan interest and the balance would have been lost.

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