Key restrictions on tax deductibility of loan interest

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Key restrictions on tax deductibility of loan interest
  • Interest deductibility
  • Trading v non-trading loan relationships
  • Restrictions on interest deductibility
  • Restricted interest deductibility—loan relationships regime TAAR
  • Restricted interest deductibility—unallowable purposes
  • Restricted interest deductibility—recharacterisation of interest as a distribution
  • Standard calculation of interest
  • Practical impact for loans of the rule recharacterising excessive interest as a distribution
  • Practical impact for loans of the rule recharacterising results-dependent interest as a distribution
  • More...

Key restrictions on tax deductibility of loan interest

This Practice Note summarises the key anti-avoidance rules that may apply to restrict the tax deductibility of loan interest for a corporate borrower within the charge to UK corporation tax. They are:

  1. the loan relationships regime TAAR

  2. the unallowable purposes rule

  3. the rules recharacterising interest as a distribution

  4. the corporate interest expense restriction

  5. the transfer pricing rules

  6. the hybrid and other mismatches rules

  7. non-market loans, and

  8. the general anti-abuse rule

For this purpose, it is assumed that the borrower and the lender are unconnected parties acting at arm's length in respect of a bilateral or syndicated loan.

Outside the scope of this Practice Note are the tax considerations relevant to:

  1. non-corporate borrowers, such as individuals—interest deductibility for income tax payers is discussed in Practice Note: Financing investment in UK real estate—Interest deductibility for income tax payers

  2. repealed provisions—examples include:

    1. the worldwide debt cap rules that were found in Part 7 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010) prior to being repealed with effect from 1 April 2017 when the corporate interest restriction rules took effect. The debt cap rules were designed to restrict the level of tax deductions claimed by companies in the UK to no more than the total financing cost of the worldwide group, thereby protecting the UK tax base. For more information

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