Tax relief is available for interest on loans where the money borrowed is used for certain qualifying purposes. Buying shares or lending money to a close company is a qualifying purpose, as long as the associated conditions are met.
A close company is one that is under the control of five or fewer participators or any number of participators if those participators are directors. Many family companies are close companies.
Relief is available for interest paid on a loan to buy ordinary shares in a close company or to lend money to a close company as long as you own 5% of the shares (either alone or together with associates) or have some shares (not necessarily 5%) and work for the greater part of your time in the management and conduct of the company’s business or that of an associated company.
It should be noted that the Government is planning to introduce a cap on income tax reliefs from 6 April 2013 (to be set at the greater of 25% of income and £50,000).
XYZ Ltd is a family company. Leo owns 60% of the ordinary share capital and his wife Julia owns the remaining 40%. Leo extends the mortgage on the family home, borrowing an additional £40,000 which he lends to the company.
As the borrowing is for a qualifying purpose, Leo is entitled to tax relief for the interest on the additional £40,000 of borrowings.