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interest on the DLA

Grey area in charging interest

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I have a client who is lending his company £200,00 to be repaid over 10 years.  Firstly, he wants to charge the company interest ont his amount  .  My question is, what rate of interest can he charge - for some reason 4% sticks in my mind but a colleague thinks it 2.5%


Secondly, I have read on HMRC that if he charges the interest , 20% must be deducted and repaid as tax on interest at the end of the year by completing form CT61.  So, I ssume from this then, the interest he receives isn't treated like interest on savings and forms part of his personal income to be taxed accordingly?


Sorry to sound thick but this is the first time Ive come across this situation


I have tried looking on the internet other than HMRC as that doesn't seem to give enough info.


I would appreciate any help with this


Thanking you in anticpationn

Replies (5)

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By Matrix
09th Apr 2019 19:39

The rate of interest should be arm’s length, what is the rate he would charge an unconnected party for the same terms?

Yes quarterly CT61s should be filed and the interest declared (together with the tax deducted at source) on the personal tax return. There is plenty of info on this or refer to the legislation.

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Replying to Matrix:
By [email protected]
10th Apr 2019 11:10

Thank you for your reply. Much appreciated

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By Rweaver
09th Apr 2019 19:47

What’s grey? Pretty clear to me.

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Replying to Rweaver:
By [email protected]
10th Apr 2019 11:16

I'm so sorry , I thought accountingweb was a place for people who are unsure of things to ask each other, not to be pompous and unhelpful. But thank you anyway

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By accountantccole
10th Apr 2019 12:29

Agree with Matrix. You could word the agreement so that interest is only payable annually to cut down the number of CT61s to be submitted.
It has scope to be a tax efficient way to extract funds, no NI and tax deductible in the company. Get a couple of online quotes to borrow the same amount and see what the rate would be from a bank. That is what the company could borrow at, why pay the owner less?
It is income for the director and therefore taxable.

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