Revenue Note for Guidance

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Revenue Note for Guidance

250A Restriction of relief to individuals in respect of loans applied in acquiring interest in companies

Summary

This section restricts the availability of interest relief to individuals under section 248 (or that section as extended by section 250) in respect of interest paid on loans applied for the purposes of acquiring share capital in, or lending to, a company.

Firstly, the new section applies where money borrowed by an individual and invested in, or loaned to, a company is used after 1 January 2003 by the company involved, in whole or in part, directly or indirectly:

  • to acquire a specified building (essentially an industrial or commercial building with a remaining tax life) from another company,
  • to replace money used to so acquire, or
  • to pay off a loan used to so acquire.

Secondly, the section covers situations where the individual uses the borrowed money to pay off a previous loan where money under that earlier loan was used, after 1 January 2003, by the company for any of these purposes.

Thirdly, the section applies to other situations where a specified building (or buildings) may already be in the ownership of a company and subsequently an individual acquires share capital in the company with borrowed money. For the section to apply in this situation, the company involved must be a company, 75% of the income of which, following the acquisition of the specified building(s), consists of rental income arising from one or more specified buildings. Additionally, the company must acquire the specified building(s) on or after 1 January 2003 from another company, and the individual must acquire the share capital in the company on or after 20 February 2004 with the borrowed money.

Where the section applies, relief for a year of assessment, under section 248 (or that section as extended by section 250) in relation to interest paid by an individual on the “specified amount” of an eligible loan may not exceed the individual’s return from the company in that year in respect of the specified amount of the loan involved. (The specified amount may be the full loan or part of the loan). An individual’s return from a company for a year of assessment is the amount of the distributions or, as applicable, the interest received by the individual from the company in the year in relation to the specified amount.

Generally, the restriction of relief in the section applies to payments of interest made by individuals on or after 19 March 2003 except in situations where a loan is used to purchase, on or after 20 February 2004, share capital in the type of rental company referred to above, in which case it applies to interest paid by individuals on or after that date.

Details

Definitions

(1) A number of terms (“distribution”, “relevant interest” and “residue of expenditure”) are defined by reference to the meaning of those terms in other provisions of the Taxes Consolidation Act 1997. Other terms are defined as follows:

“eligible loan” is defined in relation to an individual and a company and means a loan to the individual, to which section 248 applies, to defray money for any of the purposes specified in that section.

“specified amount” is defined in relation to an eligible loan. In essence, the term means the whole, or part, of the loan where the money, or the part of the money, applied by the individual:

  1. is used after 1 January 2003 by the company, directly or indirectly:
    • to acquire the relevant interest in a specified building – (this acquisition can be by the company in which the individual applied the money or by any other person),
    • to replace money used in such an acquisition, or
    • to pay off a loan used in such an acquisition;
  2. pays off another eligible loan or part of such a loan to the individual (or any previous loan/s which it replaced) which was used by the company for any of the above purposes on or after 1 January 2003;
  3. was applied in acquiring, on or after 20 February 2004, any part of the share capital of a company whose income is 75%, or more, rental income arising from one or more specified buildings. This test should be carried out in each year of assessment (after the purchase of the specified building) as claims for interest relief are being made.

“specified building” is defined in three paragraphs as follows:

Paragraph (a) requires that it be a building or structure, or part of a building or structure which is an industrial building or structure under section 268(1) and in relation to which capital allowances were or are to be made to a company under Chapter 1 of Part 9 in respect of the construction or refurbishment expenditure incurred, or the residue of that expenditure. Commercial buildings or structures in relation to which such capital allowances were or are to be made to a company by virtue of Part 10 (property based tax incentive schemes) or section 843 (third level educational buildings) or section 843A (certain childcare buildings) are also included in the definition,

Paragraph (b) requires that the company referred to in paragraph (a) (to which the capital allowances were or are to be made) held the relevant interest in the capital expenditure on the construction or refurbishment of the building at any time on or after 1 January 2003, and

Paragraph (c) requires that any other company (i.e. other than the company referred to in paragraph (a)) becomes entitled to capital allowances under Chapter 1 of Part 9 in respect of the construction or refurbishment expenditure incurred, or the residue of that expenditure, subsequent to the time referred to in paragraph (b) i.e. subsequent to the time when the previous company held the relevant interest. This entitlement must follow on from the acquisition of the relevant interest or any part of the relevant interest in the capital expenditure incurred on the building. The “other company” which becomes entitled to the capital allowances may be the company in which the individual applied money to purchase share capital in, or to lend to, or it may be any other company (e.g. a connected company). Arrangements which involve any intermediate acquisitions of the relevant interest are also brought within the definition.

“specified provisions” means section 248 and that section as extended by section 250.

Restriction of interest relief

(2) Notwithstanding the provisions of sections 248 and 250, it is provided that relief under section 248 for any year of assessment in respect of any payment of interest by an individual on the specified amount of an eligible loan shall not exceed that individual’s return from the company concerned in that year in relation to that specified amount.

In essence the amount of relief in respect of interest payments on the specified amount of a loan applied by the individual in investing in the company, is limited to the lower of the amount of the income stream arising from the application of the money defrayed by the specified amount and the amount of interest that would have been relievable in the absence of this section.

Return in relation to specified amount of eligible loan

(3) This provision, which is subject to subsection (4), explains what an individual’s return is in relation to a specified amount of an eligible loan in a year of assessment.

(3)(a) Where the specified amount defrays an amount of money applied by the individual for the purpose specified in section 248(1)(a) [acquiring ordinary share capital] or in section 248(1)(b) [lending money to the company for its trade/business or that of a connected company], the individual’s return is:

  • the amount, if any, of the distributions or, as the case may be, the interest received by the individual from the company in that year as a result of the application of that amount of money.

(3)(b) Where the specified amount defrays an amount of money applied by the individual, directly or indirectly, for the purpose or paying off the specified amount of another eligible loan where the earlier specified amount defrayed an amount of money which was applied for the purpose specified in section 248(1)(a) or (b), the individual’s return is:

  • the amount, if any, of the distributions or, as the case may be, the interest received by the individual from the company in that year as a result of the application of that earlier amount of money.

Apportionment provisions

(4) Apportionment is provided for, where necessary, of the total payments of interest by an individual on an eligible loan and of the total amount of interest received by an individual as a result of the application of all money defrayed by such a loan, in determining:

  • the amount of any payments of interest on the specified amount of the eligible loan, or
  • of the amount of any interest received as a result of the application of money which was defrayed by such a specified amount.

This apportionment is to be made in the same proportion which the specified amount of the eligible loan bears to the eligible loan itself.

Commencement

By virtue of the provisions of section 22(2) Finance Act 2004, this section applies:

  • firstly, in relation to interest paid on or after 19 March 2003. Therefore, the section impacts not alone on new loans taken out on or after 19 March 2003 but to interest payments made on or after that date in respect of loans taken out prior to that date (where the money or part of the money was used after 1 January 2003 to acquire a specified building), and
  • secondly, in relation to interest paid on or after 20 February 2004, where the section applies by virtue of paragraph (c) of the definition of “specified amount”.

For the purposes of the section interest is deemed to accrue on a daily basis.

Relevant Date: Finance Act 2019