Does anyone know whether it is allowable to claim tax relief against a self assessment on interest suffered when the individual has taken out a personal bank loan, invested the loan into a company? If so what is the process? What needs to be demonstrated i.e. bank statements showing cash into the business and the resultant calculation of interest? Any advice greatly appreciated.
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Should be OK.
I've actually done this myself. e.g.....
Borrowed £xxx to purchase shares in a close company. Interest of £x charged (don't know the amount of the top of my head). The interest is used to enhance the personal allowance as "Qualifying Loan Interest".
See http://www.hmrc.gov.uk/helpsheets/hs340.pdf for reference.
I calculated the interest due on sum of digits basis, sent my schedule to HMRC along with a letter saying "I invested £xyx into company X on date, funded by a loan of £x. Please see enclosed schedule showing the interest on a sum of digits basis split into tax year. Please add the appropriate interest relief into my tax code for the next x years".
2 weeks later I received my updated tax code.
Take care
It must be a bank loan and not an overdraft. If it is a bank loan then the bank will provide, on request, a certificate showing the interest paid and that will substantiate the deduction that you claim in the self assessment return. The deduction is claimed in box 5 on page 2 of the SA101 form.
Is the company paying interest on the sum lent to it? - if so it must deduct tax at source and account for this under the CT612 mechanism, the individual recovers the tax deducted by the offset of qualifying loan interest against this sum.
It is possible to suggest that the relief is coded in for the future as suggested above but if interest is withdrawn from the company this will then create a liability as the relief for the interest paid will have been allowed against other income.
Quite right
As long as the company used for business purposes etc then no liability but relief for you, HMRC will probably, if they query it, ask to see interest certificates, before self-assessment they had to be submitted as a matter of course and the bank should produce them free of charge. The only thing to watch then is that your director's current account does not become overdrawn as that will be treated as a withdrawal of capital reducing the qualifying loan even if not used for that purpose.
Few queries:
1. It appears that when CT61 is put in place, the individual is just a conduit for the cost of finance, with S392 relief.
2. Without CT61, the S392 relief is still obtained however the relief is against other income. The individual is out of pocket for the interest paid. If additional dividend is taken to make up for this, no further tax will be due on this additional dividend, regardless of the individual's tax band. Would that be right?
3. If the personal bank loan is provided to company at 0% interest, no CT61 is required. However, in this case the corp tax reduction for company, had the company paid the 'same interest', is lost. Would that be right?
4. Does HMRC allow CT61 be filed once in an year, when the corp tax return is due? Straddling not an issue as company tax year is June 30.
5. How do one account for the variation in loan amount due to director's loan account? i.e. calculating the totals once per year would be enough, or does it have to be more granular e.g. 3 months or less?
This query was raised in May 2012. Many things have changed in tax law since then.
So you are much better off posting this as a new query rather than attaching yourself to one that was raised so long ago.