Qualifying Loan Interest

Usually is difficult for a small business to attain finance and often the owner of the small company has to borrow personally and lend to their company thus losing the corporation veil and personally becoming liable for the loan.
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Another concern that these small business owners have is that they think they lose out on claiming tax relief for their loan, however where money is borrowed to invest in a “close” company carrying on a qualifying activity, the investor may claim relief for the interest arising as a deduction against their personal taxable income including their salary or profits from their self-employment.

What are the conditions for this relief?

As mentioned above it has to be a “close” company, generally if a company is under control of five or less people then it’s a “close” company.

The investor must either hold some ordinary shares in the company and work for the majority of their time in the management of the company or have a “Material interest” in the company.

A Material interest is defined as where more than 5% of the company’s share capital and shares are held, this can include shares held by “connected” persons (closely related family members) will usually be counted for this purpose as long as the individual holds some of the company’s shares personally.

The company should carry on a “qualifying activity”, this includes a profession, trade or property letting, so property investment companies may qualify, however they must be mainly letting properties to unconnected persons.

Advantages of borrowing personally

• Although sometimes this may be the only option, however often personal borrowing benefits from better interest rates, making personal borrowing more attractive as the individual would save both commercially and in tax.
• From the Tax point of view the major benefit is that the individual is able to set off the interest relief against their general income, so if the individual is a higher rate tax payer, relief is gained at 40%.

Disadvantages of borrowing personally

• The main downside of borrowing personally is that the loan becomes a personal debt and does not benefit from the protection of company’s limited liability status, however lenders usually insist of personal guarantees when they lend to private companies.
• Another problem may arise if the individual does not have sufficient other income to cover the interest charges on the loan, in this situation the individual can change interest on the loan to the company or take dividends if they have invested in shares..
• Lastly when a company pays interest to an investor, the company is required to deduct basic rate tax at source, however this can be reclaimed at a later date as a deduction against the investor’s personal tax bill.

If you require more information please contact us on ​​​[email protected]​.

Alex Bahamin ACCA MAAT

​About The Author;

Alex is a qualified chartered certified accountant, member of ACCA and AAT.

He is a property tax advisor, investor and has been helping landlords keep more of their wealth for themselves and their families.

With both technical expertise and personal experience of being a property investor himself, Alex can help other property investors save tax and structure their businesses in the most efficient way.