TQOTW: Qualifying Interest Relief

If I lend money to my property investment company to purchase a rental property, can I claim income tax relief on the interest I pay on the borrowings to do so?

ITA 2007 s392 details the circumstances in which an individual may be eligible for income tax relief in respect of interest paid on a loan. These are where monies are borrowed:

  • To acquire ordinary shares of a qualifying close company
  • To lend the borrowings to such a company, the loan needs to be used wholly and exclusively for the purposes of the business of the close company or of any associated qualifying close or
  • In repaying an earlier loan that had qualified for interest relief.

The purchase of a rental property would qualify as being for the business of your company.

There are however further conditions that still need to be met. ITA 2007 s393 states

Interest on a loan within section 392(1) to an individual is eligible for relief only if–

(a) when the interest is paid the company is not a close investment-holding company (CIHC), and

(b) the capital recovery condition and either the full-time working conditions or the material interest conditions are met.

Full details of the definition of a close investment-holding company are found at ITA 2007 s393A and HMRC’s guidance is in CTM60710 on Gov.UK.

The ‘capital recovery condition’ is met if in the period from the use of the loan to the date of payment of the interest, the individual has not recovered any capital from the company, apart from any amount taken into account in reducing the amount of interest eligible for relief.

The ‘full-time’ working condition is met as long as at the time the interest is paid the individual holds some part of the company’s ordinary share capital. In addition, during the period from the loan being used to the time when the interest is paid, he must have spent the greater part of his time in the actual management or conduct of the company or one of its associated companies.

If this condition is not met, consider the alternative ‘material interest condition’. Basically, an individual has a material interest if he, alone or with any associate(s), owns beneficially or is able to control more than 5% of the ordinary share capital of the company or would be entitled to more than 5% of the assets on a winding-up, etc. (See ITA 2007 s394).

Therefore, as you say you own the company, it would appear the material interest condition is met and so, as long as you do not breach the capital recovery condition, you will be entitled to income tax relief on the interest paid on your borrowings.

HMRC guidance on interest relief can be found on Gov.UK at SAIM10000 with loans to companies starting at SAIM10210.

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Marsha began her career in tax 13 years ago working in the personal tax departments of 2 small accountancy firms where she mainly dealt with sole traders, partnerships and OMBs. Having gained the ATT and CTA qualifications she then moved to a firm of Chartered Tax Advisers working for the last 8 years as an Assistant Tax Manager in the private client department where the majority of her clients were high net worth individuals.

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