Qualifying loan interest

By Tolley

The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Qualifying loan interest
  • What is a qualifying loan?
  • Investing in a close company
  • Investing in a partnership
  • Purchasing plant and machinery
  • Tax relief on interest paid
  • Recovery of capital
  • Anti-avoidance
  • Cap on income tax reliefs

Interest paid on qualifying loans is deducted from the taxpayer’s total income (ie aStep 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, he may be required to deduct basic rate tax on this amount; it will depend on whether the lender has aUK permanent establishment. See Simon’s Taxes A4.424 (subscription sensitive).

ITA 2007, ss 874, 888E

Qualifying loan interest relief is included in the cap on unlimited income tax reliefs (see below).

What is aqualifying loan?

A qualifying loan is one where the capital amount has been used for aqualifying purpose.

The qualifying purposes are set out in the legislation:

  • investing in aclose company (ITA 2007, s 392)
  • investing in apartnership (ITA 2007, s 398)
  • buying shares in an employee-controlled company (ITA 2007, s 396)
  • purchasing plant or machinery for use in employment (ITA 2007, s 390)
  • purchasing plant and machinery for use by the partnership (ITA 2007, s 388)
  • investing in aco-operative (ITA 2007, s 401)
  • paying an inheritance tax liability (ITA 2007, s 403)

In addition to the qualifying purpose, the loan itself must not be an overdrawn account or money withdrawn on acredit card.

ITA 2007, s 384

For further reading, see Simon’s Taxes E1.820 (subscription sensitive).

The more common examples of qualifying loans are considered below.

Investing in aclose company

A loan taken out by an individual to

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