Taxation of loan relationships

By Tolley
OMB_tax_img7

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

  • Taxation of loan relationships
  • Purpose of the loan relationship
  • ‘Computation of relevant debits and credits’
  • Tax treatment of relevant debits and credits
  • Pre-trading financing costs

As the tax treatment of the loan relationship differs slightly depending on whether the loan relationship is for trading or non-trading purposes, it is necessary to establish the purpose of the loan.

 

As the tax treatment of the loan relationship differs slightly depending on whether the loan relationship is for trading or non-trading purposes, it is necessary to establish the purpose of the loan (see below). It is then necessary to calculate the relevant debits and credits for the loan relationships. The tax treatment of the relevant debits and credits then differs slightly depending upon the nature of the loan relationship (ie whether it is for trading or non-trading purposes).

CTA 2009, s 307

See also Flowchart ― tax treatment of loan relationships.

Purpose of the loan relationship

As the tax treatment differs, it is necessary also to establish the purpose of the loan relationship to determine on which line of the corporation tax computation the income and expenses need to be included ― trading or non-trading.

CFM32010
Trading loan relationship

A loan will have a trade purpose if the funds are used to generate income which is taxed as trade profits. An example could be a loan to buy stock used in the trade.

Examples of a loan for trade purposes include:

  • a loan to buy plant and machinery or a factory for use in the company’s trade
  • a bank overdraft to fund the working capital of the business, and
  • a bank loaning money to its customers

Property income is not treated as a trade for loan relationship purposes. This includes where a property is a furnished holiday let.

CFM32030

Where the company is the lender, in order for a trading loan relationship to exist, the company must be lending as an integral part of its trade. This will only usually be the case for banks and financial institutions, etc.

More on Corporate debt: