Allowability of interest

Allowability of interest

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I have a Property company client that loaned a significant sum to an associated trading (DI) company following the refinance of some of it's properties.

No interest was ever charged and only some of the loan was repaid as the trading company had financial difficulties and was liquidated.

HMRC are attemting to disallow a proportion of the total loan interest in the property company as the loans exceed the cost of the properties.

I understand the principle here, however, can we argue that the interest is allowable as the company receiving the loan was trading and therefore it would have been allowable in their accounts?

I would have advised a proper loan agreement at an appropriate rate of interest, however, this was done some time ago before I picked up the client.

Any thoughts?
GB

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By User deleted
27th Aug 2008 09:12

Can you quantify
Thanks Neil, I feared as much. I do, however, think that the inspector has his numbers wrong.

For the sake of simplicity I will use easy numbers but the balance sheet is basically.

Cost of Properties 100
Cash 100
Inter Co Debtors 100

Loans 250
Reserves 50

The inspector is attempting to disallow interest on 150 as the properties only cost 100.

I would say that he should only disallow 50 as there is no reason to disallow the interest charged on what is effectively cash held.

What do you think?

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By neileg
22nd Aug 2008 11:36

Uphill
I think HMRC have it right on this one. Interest is allowable because it is an expense of the trade. To the extent that the loan was used to finance the associated company, this takes it out of the trading activities of the property company.

If you could find a way of attributing the loan to something else, perhaps supporting trading losses, then you might make a case. But it's going to be an uphill battle.

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