3Spoken

Getting It Out – Qualifying Interest Payments

Interest payments on qualifying loans

Income Type

Savings Income – Tax Free

Company Impact

Deductible against corporation tax.

Individual Impact

Income Tax due. Offset claimed on Tax Return.
No National insurance

How much?

An amount that matches the interest paid on the qualifying loan amount.
(Note that it is just the interest that qualifies for tax relief not any capital repayments).

The qualifying loan amount is the lower of the amount that was lent to the company, the amount outstanding with the lender, or the lowest level of your personal deposit account since the money was lent to the company.

How it works

The terminology for this relief is complicated, but it boils down to the company paying part of your mortgage or loan without any tax charges as long as you follow the rules correctly.

The rules however are irritatingly complex:

  1. Firstly you must own and/or work full time in managing the company.
  2. the loan taken out must be a new loan for the purpose. So essentially you have to remortgage, refinance or take out a new loan for the job. You can’t just repurpose your existing mortgage.
  3. the loan must be lent on to the company and used in the business within a ‘reasonable’ time period from when the loan is taken out.

Relief is restricted to the amount of interest paid on the mortgage/loan, and is further restricted to the interest on the amount outstanding with the company. Essentially this is the lower of the amount originally lent to the company, the amount of the outstanding qualifying loan, or the lowest value of your personal deposit account with the company since the money was lent.

An example will make that clearer.

An individual borrows £50K on his mortgage ‘for business funding’ and lends it to the company for working capital purposes. The interest rate on the mortgage is 5% so the annual interest payment is £2,500. This is the amount the company can pay per annum to the individual tax free.

In year one the individual receives a honorarium of £5K which he doesn’t draw. So the personal deposit account stands at £55K. However the company can still only pay £2500 interest tax free because that was the amount lent to the company initially.

In year two the cash comes in and the individual needs to draw some funds. He withdraws £15K leaving the deposit account at £40K. The company can now only pay 5% interest on £40K (£2000) tax free.

In year three the individual gets dividends of £25K and takes out £15K, leaving the deposit account at £50K. However the company can still on pay 5% interest on £40K (£2000) tax free because that was the lowest level of the personal deposit account since the money was lent.

Time passes and the capital value of the mortgage drops below £40K to £35K. Now the company can only pay 5% interest tax free on the outstanding amount of £35K (£1,750).

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