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qualifying loan interest

qualifying loan interest - what counts as interest?

Individual taxpayer borrows say £100,000 for a qualifying purposes at 8% per annum accrued daily and compounded on the first day of the month. The loan plus accumulated rolled up interest is repayable in full after 3 years but partial repayment is allowed after 2 years.

My understanding is that the accrual and compounding does not constitute "payment" for the purposes of claiming QLI. However if the individual makes a partial repayment of the loan and accrued compounded interest in a tax year, has the individual got a right to claim that the repayment represents interest only bearing in mind that from the lenders point of view it makes no difference to the eventual cash flow whether the repayment is deemend interest or principle?

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26th Feb 2018 13:15

Does the repayment reduce the calculation of the interest? If so it would appear to be capital (If not, I'm not certain why you would want to make an early repayment!).
If it does not reduce the capital in the interest calculation, then I would suggest that it must, at least in part, constitute the payment of interest.
If possible make sure that the treatment by the lender and borrower matches.

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to firecodeblue
26th Feb 2018 13:51

But surely, the addition of interest to the loan might increase the amount on which interest is charged, and then if the payment decreased the amount on which interest is being charged, it might be the added interest that was being repaid?

However, the law generally presumes that it is the earliest part of the debt (ie the original capital) that is being repaid first.

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26th Feb 2018 13:59

thank you because the interest is accrued daily it makes no difference to the accumulated balance due.

Portia's point about early repayments being deemed as capital first is important as in principle it could mean that the deferring of a final payment could deem that final payment all interest which in this case could be helpful.

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