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Beneficial loan interest rate

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9th Feb 2009
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The recent reductions in base rate by the bank of England have been reflected in the rates of interest charged and paid by HMRC on tax paid late or overpaid. The tax authority even changed the mechanism by which interest rates were set earlier this year, so that tax interest rates could follow the bank base rate down more swiftly. This change was accompanied by a further amendment designed to ensure that rates could not turn “negative” – otherwise HMRC would be charging us interest for paying our tax early!

There was also an announcement about the “official” rate of interest on beneficial loans. This is to be reduced with effect from 1 March 2009 to a rate of 4.75%. The current rate is 6.25%. This reduction is of course welcome, but it hardly reflects reality. If a company makes a loan of more than £5,000 to an employee, then unless interest is charged at the official rate, a benefit in kind will arise. The rate applies to all loans, including staff mortgages, large season ticket loans or other loans. Loans which do not exceed £5,000 at any time during the tax year are exempt from tax under the benefit in kind rules.

There is concern at the rate reduction for a number of reasons. First, the rate is normally not changed mid year. Although you may argue that it is a welcome development for the rate to be reduced in year, the effect of awarding the reduction for an extra period of 36 days is highly dubious in comparison to the upheaval of amending the rate. Large businesses will have no problem reprogramming their software to calculate the interest accordingly, but anyone doing a manual calculation may think that the reduction is more trouble than it is worth. The reduction saves just £14.79 in interest on a loan of £10,000.

Secondly, the average rate for the year is unchanged at 6.25%. This means that those computing the benefit in kind on a loan by averaging the opening and closing balances will not benefit from the rate reduction. More reason to have held the reduction back until 6 April? Only those calculating the benefit in kind on the strict daily basis will benefit anyway.

Finally, if a borrower has a taxable loan it is likely that the current rate of 4.75% exceeds the interest rate actually charged, even if the loan is not on “favourable terms”. Many borrowers with mortgages on tracker and standard variable rate are paying (or will shortly be paying) less than this – so a market value loan will trigger a benefit in kind charge. Why? If the rate is to be changed, could not a more appropriate rate have been selected?

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By User deleted
10th Feb 2009 17:11

Seems unfair....
"The tax authority even changed the mechanism by which interest rates were set earlier this year, so that tax interest rates could follow the bank base rate down more swiftly."

Clearly this is not happening. Does anyone know how the tax authority decides on the offiical rate of interest?

The official rate of interest has been 6.25% since 6 April 2007 and HMRC announced the rate would be frozen for 2008/2009 "subject to review in the event of significant rate changes" So from 1 March 2009 it is 4.75%.

The base rate has plummeted from 5.75% in July 2007 to 1% this month. It is clear there has been significant rate changes - but the same cannot be said for the change to the official rate of interest

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