Shares v debt

By Tolley
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The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Shares v debt
  • Raising money by way of loan capital
  • Share capital
  • Qualifying loan interest relief - close company shares
  • Use of EIS losses against income
  • CGT Relief for loans to traders

Raising money by way of loan capital
Sole traders and partnerships

For unincorporated businesses, provided the loan is taken out for a business purpose (eg to buy stock, to pay staff wages or to buy an asset to be used in the trade), interest payments will be allowable expenses for tax purposes. This will include overdraft interest (providing the account is a genuine business account and is not used to fund personal expenses).

Where the loan is taken out for a 'mixed' purpose (for example, to buy a car where the car is used for both business and personal use), only the business proportion of the interest is allowed.

No deduction is allowed for the repayment of the capital part of the loan itself. Monthly loan repayments will therefore need to be split between the interest and the capital repayment elements.

No deduction is available for interest on overdue tax (as this is not an expense incurred in the course of making profits).

ITTOIA 2005, s 54

Incidental costs of obtaining loan finance (eg loan arrangement fees etc) are allowed.

ITTOIA 2005, s 58

For additional guidance on interest for sole traders, see the Financing related guidance note.

If an individual borrows money to contribute capital to a partnership, then the interest paid on that loan may qualify for tax relief.

For more guidance on this see the Qualifying loan interest guidance note in the Personal Tax Module (subscription sensitive).

Companies

For companies, the taxation of loan interest is under the loa

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