Don’t lose out on tax relief on loans to companies

The issue

Generally if you borrow funds to help out your company then you should be able to benefit from tax relief in respect of any interest that you pay in respect of the loan. However you need to meet various conditions in order to enjoy this relief.

Tax relief conditions

These are as follows:

1. The loan must be used to purchase 5% or more of the ordinary share capital in a close company or lent to a close company in which you own 5% or more of the ordinary share capital.
   2. The company must be a trading company.
   3. The borrowing cannot be an overdraft, credit card or similar arrangement.

However things are not quite so simple as there are also anti-avoidance rules.

Anti-avoidance tax rules

There are rules which stop you from enjoying relief in respect of funds which are no longer being enjoyed by the company. For example if a director borrows £100,000 which he lends to his company he will cease to enjoy full tax relief on the interest if he is repaid by the company but then does not use the funds to repay his lender. This will be the case even if he then re-advances a loan to the company. Therefore, in an extreme case, if he were to be repaid the £100,000 loan by the company, no interest relief would be available on his loan from that point – even if he were to (again) lend £100,000 to the company a couple of weeks later.

One way of avoiding this problem is to consider capitalising any loans to the company, because then relief will only be lost if you sell or transfer the shares.

Final comment

In general, directors should take care and seek advice whenever they do anything to a loan to a company in respect of which they are enjoying tax relief on a personal loan.

Forbes Dawson are an independently owned, tax-only firm offering specialist tax consultancy services to private clients, businesses and professional advisers.