What are the tax laws on UK loan interest?

In 2000, Gordon Brown changed the rules on tax relief from mortgage interest, in that a homeowner could no longer receive it. This removed the last bastion of tax relief for the consumer borrower. From then on, there is no way to obtain any form of tax relief on non-commercial loans. But some people are still confused on this, and when given the choice of paying for something in cash or getting a loan to cover the cost, still think that there is a way to get tax relief on loan interest and they can get around the rules. Alas, there isn't, and the Inland Revenue are becoming more and more strict on this issue.

If you are a shareholder director or a partner in a business, you need to think about how to arrange your loans and your business finance in a way that is tax-efficient. If you are not at the moment, then you should be careful when correcting it. The IR are challenge-happy at the moment.

So what kinds of situations could arise? Well, let's say a partner in a business has lent money to their business at the same time as borrowing money with which to buy a home. If the partner had taken out a loan with which to finance the business, then the interest on that would have been tax deductible, but the interest that they are paying on the home loan is not qualified for tax relief. The partner could have had his finances reorganised in the past to rectify this situation- so that they could repay the mortgage with capital from the organization, then taking out a new loan to refinance the partnership. This could be a reconstruction carried out for many companies. In the past, the Inland Revenue judged this to be a generally acceptable practice.

However, all good things come to an end, and sure enough, the Inland Revenue has decided that reconstructing of finances with the sole intention of obtaining tax relief is not satisfactory. They have in fact recently taken a case to the Special Commissioners to ask that they can deny tax relief in the circumstances above, citing a little-used section of the Taxes Act that prevents tax relief being allowed on any interest paid when the acquisition of tax relief was the main purpose of that transaction. However, the case that the Inland Revenue took to the Special Commissioners was badly structured and unsatisfactorily documented, so it might still be possible to perform this type of finance reorganization successfully.

Ultimately - its worth paying for good tax advice before you actually do anything. Tax relief on loan interest is useful, but losing an Inland Revenue case can scar you and your business for a long while.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

Loans

Ask About

> Loans Advice
> What is a personal loan?
> What is a secured personal loan?
> What is an unsecured personal loan?
> Do companies specialize in student loans?
> What is the difference between a bank loan and a personal loan?
> Will I be able to get a loan if I have bad credit?
> I need to consolidate my debts, is it advisable to get a consolidation loan?
> What is a bridging loan?
> How do I find the cheapest rate for loans?
> How do I find a low interest loan?
> What is a career development loan?
> I am a tenant, how am I able to get a personal loan?
> What is a home improvement loan?
> Can I take out payment protection on the loan?
> Is Payment Protection Insurance Suitable for me?
> Can I claim on PPP if I am suffering from stress or mental illness?
> What is the difference between a mortgage and a loan?
> What is a business loan?
> How are Business Loans structured?
> Should I get a Small Business Loan?
> What is a home equity loan?
> What are the tax laws on UK loan interest?
> How do I get an online loan?
> What kinds of loan company can I find?
> What is a Flexible Loan?
> How do I apply for a loan?
> How do I get a fast loan?
> How do I get an easy loan?
> How do I use a loan calculator?
> How do I get a fast cash loan?
> How is my loan rate calculated?
> How do I compare APRs?
> What is credit scoring?
> Why do some lenders decline my loan applications?
> What is a credit reference agency?
> What do I do if credit reference agency information stops me getting credit?
> What do I do if I get into loan repayment Difficulties?
> What are the alternatives to taking out a loan?
> What are the different types of loan interest?
> What are car loans