In the case of Garrett Paul Curran (TC02194) – published on 29 August – the First-tier Tribunal held that an advance payment of interest was deductible under the ‘loans to buy an interest in a close company’ provisions in ICTA s 360 (now ITA s 392).
Mr Curran took out a loan to fund onward loans to two close companies carrying on a property investment business. The terms of the loan taken out by Mr Curran included a provision that interest must be paid at commercial rates over the 30 year term. Shortly after the loan was taken out, Mr Curran and the lendor agreed that Mr Curran could pay the whole of the outstanding interest in advance at a discounted value. Mr Curran claimed relief under ICTA s 360.
Tax relief is available in relation to interest paid on a loan used to lend money to a close company in which the individual either:
- owns at least 5% of the share capital, or
- owns some of the ordinary shares in the company and has spent time managing the company during the period from when the loan was made to when the interest was paid.
HMRC denied full relief on two grounds, namely:
- that the payment made by Mr Curran was capital and not revenue and therefore was not a payment of interest.
- that the anti-avoidance provisions of ICTA s 787 applied becasue the sole or main benefit of the payment was obtaining tax relief.
The Tribunal did not accept these arguments. First, they held that the payment was interest and not capital, viz:
“The parties chose to lend and borrow at interest, and they chose to offer and accept that such interest be paid in advance, on discounted terms. That was the choice of the parties, that was the substance and reality of what was done and………. the Crown cannot go behind that choice.”
Secondly, the Tribunal held that the anti-avoidance provision of ICTA s 787 did not apply. They found that:
“Mr Curran took tax into account in deciding to enter into the various transactions, but that he decided to enter into those transactions for investment reasons.”
The benefit of the tax relief was outweighed by the investment benefit to Mr Curran. Therefore tax relief on the interest was not the sole or main benefit of the advance payment of interest.
What does this mean?
This is an important case because it means that individuals can accelerate tax relief by paying interest in advance in certain cases. This may be advantageous where an individual’s marginal rate of income tax varies from year to year. It is of course important that any decision to pay interest in advance is not made wholly or mainly because of a tax avoidance motive. Consideration should also be given as to how this will be affected by the cap on income tax reliefs, if it is enacted.
For more information in relation to availability of interest reliefplease contact the TaxDesk on 0845 4900 509 and ask for Priya Dutta.