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Income tax - treatment of income

Income tax - treatment of income


I was wondering if you could help.  I am in the process of setting up a loan arrangement between a company and an individual.  The individual will loan the company money and receive interest on this.  There will also be an early exit fee clause in the agreement.  My question is that will the early exit fee be treated as a chargeable gain on the individual when it is received or treated as normal income in the same vein as the interest payments received?  I have had a look at the manuals on HMRC but cannot see anything in relation to an individual receiving an early exit fee.  Any advice/links to legislation would be greatly appreciated!!



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28th May 2012 23:14

Exit fee

I assume that the company has the option to repay the loan early but has to pay a fee to be able to do so.  If the loan were by another company the position would be dealt with under the loan relationship rules, this can't be.

Is this a simple loan - probably not because of the written element of the agreement, it is a chargeable asset as a debt on a security - that being the written agreement for the loan.  Is it a qualifying corporate debt? Possibly not but if it were it would be exempt from CGT.  If it is a QCB, and it may be, the fee is a capital gain but is exempt.  If it is not a QCB but it is a debt on security the fee is a gain on realisation and chargeable to CGT.

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29th May 2012 08:24

I'd be inclined to treat it as interest

Because that is effectively what it is - a payment to reflect the interest lost as a result of early repayment. I may be wrong, but I can't see how it falls within CGT - repayment of debt does not amount to dispsoal of a chargeable asset.

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29th May 2012 10:15

If a debt on a security...

If the instrument that creates the loan is transferable as a separate transaction from the repayment of the loan it would constitute a debt on a security, the most simple of which is the loan note, and that then falls into the CGT world.  As a simple loan with no separate security BKD is right and of course the security is the written agreement not the security in any asset sense.  I suppose it could also be possible to look upon the fee as creating a discounted security which would, again, put it into the field of interest.

The company's position seems clear, the loan relationship rules apply to it and that can't be altered unless the repayment fee were not for an allowable purpose, which seems unlikely.  I'd be inclined, if the fee gets paid, to seek a ruling on it. 

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