The following Personal Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
Interest paid on qualifying loans is deducted from the taxpayer’s total income (ie a Step 2 deduction from total income). See the Proforma income tax calculation guidance note.
Interest on qualifying loans is usually paid gross by the individual borrower; tax is not withheld at source. This includes interest payments made by the individual to peer-to-peer lenders. However, where the individual pays interest to an overseas lender, they may be required to deduct basic rate tax on this amount; it will depend on whether the lender has a UK permanent establishment. See Simon’s Taxes A4.424.
Qualifying loan interest relief is included in the cap on unlimited income tax reliefs (see below).
A qualifying loan is one where the capital amount has been used for a qualifying purpose.
The qualifying purposes are set out in the legislation:
investing in a close company
investing in a partnership
buying shares in an employee-controlled company
purchasing plant or machinery for use in employment
purchasing plant and machinery for use by the partnership
investing in a co-operative
paying an inheritance tax liability
In addition to the qualifying purpose, the loan itself must not be an overdrawn account or money withdrawn on a credit card.
For further reading, see Simon’s Taxes E1.820.
The more common examples of qualifying loans are considered below.
A loan taken out by an individual to invest in a company is a qualifying loan if:
it is used to acquire ordinary shares in a ‘close company’ that is not a ‘close investment-holding company’
it is lent to such a company and used wholly and exclusively for the purposes of the business, or
it is used to repay another qualifying loan
the individual works for the company and owns some of the ordinary shares (the full-time working condition), or
he holds at least 5% of the share capital, taking into account shareholdings of ‘associates’ (the material interest condition)
ITA 2007, ss 392–394
For the definition of
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