TQOTW: Loans to Employees

Many of my small company clients often have overdrawn director loan accounts. When considering minimising the beneficial loan charge, what interest can be taken into account to reduce or cancel the benefit charge?

The employment-related loan legislation is designed to tax the benefit of a loan to an employee or officer where the loan value is over £10,000 at any time in the tax year and either no interest is paid or interest below the official rate (currently 2.5%) is paid by the borrower.

Although there is often an area of overlap between the s175 ITEPA 2003 beneficial loan charge and the loan to participators legislation in CTA2010 s.455 they are separate and distinct issues.

ITEPA 2003 s.175(3) (b) states that the benefit in kind is reduced by the amount of the interest paid. In HMRC’s view (see EIM26250) the following conditions must be met for the interest to have been paid.

  • The interest must be paid.
  • The interest must be paid for the year of assessment, but not necessarily in the year of assessment.
  • HMRC require an obligation to pay the interest during the tax year (see EIM26257)
  • HMRC do not accept that interest that is capitalised has actually been paid (see EIM26251).

HMRC’s view in EIM26250 is that interest cannot arise except under an obligation. Thus, a voluntary payment cannot be interest. Considering this, we would advise that a formal loan agreement be put in place in order to prove this obligation exists.

HMRC’s view in EIM26251 which refers to supporting case law is that capitalising interest does not constitute a payment of interest and so the s175 charge still arises.

Finally, note that interest cannot be backdated (see SAIM2040). Therefore the obligation to pay interest must be in place throughout the period concerned.


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Trainee Tax Adviser
0844 892 2470


Alexander has worked at Croner Taxwise since 2014. He has successfully completed his IR35 training and undertakes contract reviews. Alexander gained his tax knowledge whilst working in the consultancy department of Croner Taxwise and he is currently working towards the ATT qualification.

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