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Claiming interest

I've just taken a new client, who three years ago, re-mortgaged his house to buy his business. The previous accountant has never claimed for the interest on the business element of the mortgage. Can I claim for all his interest payments over the last three years in his current accounts. If so, do I need to include an explanatory note in his SATR.

Also, the goodwill for the business has never been included in his previous accounts. Do I just include this in his current accounts?


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Probably not

I'm assuming client is a sole trader. Interest on borrowings for the purpose of the trade is allowable, interest to buy the trade is not.

You can include goodwill in the accounts if you want, but it doesn't achieve anything from a tax perspective.

But you need to clarify that status of the business.

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I disagree

Sorry, Penny, I disagree. Interest on a loan to purchase assets used in a sole proprietor's business is tax deductible - even if secured on his home (as HMRC acknowledge in the Business Income Manual). Buying a business as a sole trader would, of necessity, involve the purchase of business assets (including goodwill) - and presumably that is what the client has done here. It is no different to borrowing money to buy, say, plant and machinery for the business. Provided the assets are business assets (and, yes, a balance sheet should be prepared - showing goodwill if it is purchased goodwill), and the client hasn't withdrawn more capital than has gone in to the business, relief will be available.

Here is an extract from the BIM:

"A business needs funding. A proprietor can do this by introducing money from savings or assets that are already owned into the business. Or it can be done by borrowing money. Once the business is up and running, it may generate cash to meet new funding needs or to repay old loans.

When the business is funded using borrowed money and that money is used for business purposes the interest is allowable as a deduction in computing the business profits. The interest is not allowable as a deduction if the funds are being used for private purposes. "

But the claim shouldn't really be in one year - HMRC could well refuse that. You can try if there is definitely no effect on the tax but you run the risk of it being rejected after the error or mistake claim time limit has expired. I would recommend that you amend the in year return and make an error or mistake claim for the earlier years. HMRC may well ask questions so get your ducks in a row and make sure the loan was genuinely for the purchase of the business assets.


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There is a subtle difference

Between a trader borrowing money for the purposes of his trade, and a non-trader borrowing money to acquire a trade. It is one of the key differences between a sole trader and a partnership - an individual can lend money to a partnership and obtain tax relief, but he cannot lend to himself. I suspect that the tax treatment may follow the accounts, though - if the accounts show Dr assets, Cr loan then there may be an argument for claiming relief through the Sch D computations. Otherwise (did the accounts show Dr assets, Cr capital introduced?) there is no mechanism for claiming interest relief outside the accounts.

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Via accounts

I quite agree that the mechanism for claiming is through the accounts/self-employed section of the tax return. But that is what the OP was suggesting - not some sort of claim for interest paid on money 'lent' to himself as a sole trader, which would clearly be impossible.

I think you are agreeing with me, Penny, that if this client took out a mortgage specifically to buy the assets of a trade (which surely is the only way one can buy an unincorporated trade?) which he then uses in that trade himself (or, indeed, in a different trade), the interest relief can be claimed against his self-employed income.

I think I may be having a slow brain day as I can't really see what you mean by a non-trader borrowing money to buy a trade - unless you mean someone buying the assets of a trading business but then not actually trading (maybe using the assets privately?) when clearly no relief would be due. Or borrowing with no specific purpose but subsequently using the money to buy a trade (but then he isn't 'borrowing money to buy a trade'). But maybe it's just me!

Iin this case, relief would seem to be available if the loan was to buy the trading assets and the accounts figures are revised to show interest paid in this respect.


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What I meant by 'non-trader' was that

until the individual has bought the trade then, by definition, he cannot be carrying on the trade. If his first accounts showed Dr assets Cr loan, I can see where the interest claim would come from. But, there is an alternative accounting treatment - which is to credit capital introduced.

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