Tax treatment capitalised interest on DLA

What is tax treatment of capitalised interest on DLA (credit balance)

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Client put 50,000 into his new Limited Company. A proper loan agreement was drawn up capitalising the interest until the loan is repaid. The loan was used as working capital (purchase stock, marketing etc). So trading loan I believe.

The loan was put into the business at the beginning of 2019 and the loan agreement currently says repayment of capital and the capitalised interest will be at the end of 2021.

Where should the annual interest be debited to in the Accounts and Company Tax Return and will it be tax deductible for the Company each year? Or will the Company have to wait until the end of 2021 to get the tax relief at the same time as the Director is potentially taxable on his interest income?

Will tax need to be deducted at source by the Company when it pays the Director the interest?

I believe the Director will be taxed on the interest when it is paid

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By johngroganjga
10th Apr 2020 18:18

The company will obviously expense the interest cost as it is incurred - accruals basis anyone?

In order for the interest not to be taxable on the lender until actually paid to him I think it will have to be credited to accrued interest payable and not to the loan itself.

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Replying to johngroganjga:
paddle steamer
By DJKL
10th Apr 2020 20:11

I concur- we have to do similar re preference dividends treated as interest within our accounts.

Dr Dividends Cr Provision for dividends

Re tax the OP might want to look at this.

https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm35810

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