Relief for interest- get it right

Interest relief for loans taken out to acquire shares in or to lend money to a close company is a valuable relief if you get it right.  If you get it wrong the consequences can be expensive as Mr Green learned in a recent First-tier Tribunal case.

Mr and Mrs Green owned land which they decided to develop for the rental and sale of retirement and mobile homes.  They used their company to undertake the development of the site and the trading activities.

Mr and Mrs Green approached their bank for funds to provide working capital to the company. The funds were received by way of a bank overdraft. They told the bank that at some point they intended to transfer the overdraft to the company (which would have required the transfer of the property to the company). In the interim the bank required a joint and several guarantee from Mr and Mrs Green, together with a debenture from the company to provide security on the value of the mobile homes.

Mr Green paid interest to the bank, and was reimbursed by the company. He did not include the interest on his personal tax return and argued that the amounts received from the company were reduced to nil on the basis that interest relief was available under S353 ICTA 1998 (now s 392 ITA 2007).

The rules on interest relief are strict and there is no relief for interest on overdrafts, which is specifically excluded under section 384 ITA 2007 (then s 353(3) ICTA 1988). On this basis the claim was denied. Had Mr Green taken out a loan instead and lent the money to his company he would have been able to claim income tax relief for interest paid on the basis that the company used the money wholly and exclusively for the purposes of its business.

This FTT decision demonstrates the need to ensure a facility qualifies if the shareholders intend to rely on s383 ITA 2007.


Quick recap of interest relief


Interest relief is available under s392 ITA 2007 where an individual borrows money and uses it to:

  • Acquire ordinary shares in a close company where the company is not a close investment holding company; or
  • Lend money to a close company (but not a close investment holding company) which is used wholly and exclusively for the purposes of the business of the company or an associated company; or
  • Repay another loan to which relief is given under ITA 2007, s392.

At the time the interest is paid, the individual must have a material interest (5%) or meet the full-time working conditions during the period from the use of the loan to the payment of the interest.    Under the full-time working conditions the individual must hold some of the ordinary shares and work for the greater part of his time in the actual management or conduct of the company.  This limits the relief for employees without a material interest to those at a very senior level.

There are some strict rules on the return of capital. If the individual recovers any money from the company and this is not used to repay the borrowings, the individual is treated as if the amounts had been used to repay some of the borrowings, thereby restricting the interest relief. A recovery of capital occurs where:

•             the individual sells or gives away some or all of his shares;

•             all or part of the loan is repaid by the company; or

•             the debt is assigned — this includes where it is converted into shares.


If you have a shareholder in Mr Green’s position all is not lost.  With some careful planning and the use of a new loan the overdraft can be replaced in a way which qualifies for relief. Please contact Taxdesk on 0845 4900 509 and ask for Paul Howard for more details.