Revenue Note for Guidance

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Revenue Note for Guidance

248 Relief to individuals on loans applied in acquiring interest in companies

Summary

This section contains provisions in relation to an individual borrower corresponding broadly to those in relation to a corporate borrower in section 247. The provisions are designed to cater for the case of an individual who borrows money for the purpose of purchasing an interest in a company. The main condition to be satisfied before the relief can be given is that, taking as a whole the period from the application of the loan until the interest was paid, the individual must have worked for the greater part of his/her time in the management or conduct of the business of the company or of a connected company.

The allowance of relief under this section does not preclude a claim for unrestricted relief on other “business” interest under section 81.

Section 249 contains anti-avoidance provisions applicable to the section.

The relief is not available for new loans made on or after 7 December 2010 and, for qualifying loans made before 7 December 2010, relief is phased out over the tax years 2011 to 2013. No relief is available for the tax year 2014 and subsequent tax years.

Details

Application

(1) The section applies to interest on money borrowed —

  • (a) to acquire ordinary shares of —
    • a trading company, or
    • a company the business of which consists wholly or mainly of holding stocks, shares or securities in such a company,
  • (b) to lend money to such a company, or
  • (c) to pay off another loan which was applied for either of those purposes.

(1A) The relief in respect of replacement loans under subsection (1)(c) will not be available unless —

  1. the new loan is not greater that the amount of the balance yet to be paid off the previous loan, and
  2. the term of the new loan is no longer than the balance of the term of the former loan.

The relief

(2) Unrestricted relief is available for an individual in respect of interest on a loan obtained for any of these purposes provided that the individual fulfils certain conditions in relation to the company in which the loan was invested or with a company connected with that company. Those conditions are —

  • when the interest is paid the investing individual must have a material interest (“material interest” is the beneficial ownership of or the ability to control directly or indirectly more than 5 per cent of the ordinary share capital of the company) in the company or in a connected company (a connected company is a company which is a trading company, a “Case V income” company or a holding company of the type referred to in subsection (2)(a) and which is regarded as connected with the company by virtue of section 10),
  • during the period taken as a whole from the application of the loan to the time the interest was paid the individual worked for the greater part of his/her time in the actual management or conduct of the business of the company or of a connected company, and
  • during that period the investing individual did not recover any capital from the company or from a connected company, apart from any amount taken into account under section 249.

Tax avoidance

(3) Relief is denied for interest paid on or after 24 January, 1992 unless the loan is applied for bona fide commercial purposes and is not part of a tax avoidance scheme.

Use of loan

(4) The loan must have been made in connection with the application of the money and must have been made either on the occasion of its application or within what is in the circumstances a reasonable time, and the loan must not have been applied for some other purpose before being applied as described in subsection (1). The placing on temporary deposit (for example, with a bank or a building society) of loans of predetermined amounts should not be regarded as an application of the loans for “some other purpose”.

Granting of relief

(5) Interest eligible for relief under this section is to be treated as a non-retainable charge on the borrower’s income for the year in which the interest is paid. This enables relief to be given by repayment if necessary. In other words, the interest is to be treated as a deduction in computing the amount of the borrower’s income chargeable to tax. Interest eligible for relief under this section is not eligible for relief under any other provision.

Phasing out the relief

(6) & (7) The relief is not available for interest paid on new loans made on or after 7 December 2010.

Furthermore, the relief is not available, as and from 1 January 2014 for interest paid on loans made prior to 7 December 2010 and for such loans, for the tax year 2011, 75% of the qualifying interest paid qualifies for relief; for the tax year 2012, 50% of the qualifying interest paid qualifies for relief; and for the tax year 2013, 25% of the qualifying interest paid qualifies for relief.

Relevant Date: Finance Act 2019