Tax Deductions for Business Loans: What You Need to Know
Tax relief on qualifying loans can be a valuable tool for business owners. Qualifying interest deductions on loans taken out for business purposes can reduce an individuals’ tax burdens and better manage cash flow.
Where an individual takes out a loan to buy shares in a ‘close company’, tax relief may be available on any interest they pay.
Broadly, a ‘close company’ is one that is controlled by five or fewer shareholders or any number of shareholders, all of whom are directors.
When Is Relief Available?
Tax relief is available when a personal loan is taken out by an individual that meets certain ‘qualifying’ conditions. The main circumstances include:
- For an individual to purchase shares in a close company or in lending money to a company, which then uses the loan wholly and exclusively for the purposes of its business. The person claiming relief must either work for the company or hold more than 5% of the company’s share capital. Loans used for unrelated purposes or those not tied to business activities are generally ineligible.
- To buy plant or machinery for partnerships or employment use. The interest is allowed in the year of the loan and the next three years. The plant or machinery must be such that the partnership (in the case of the partner) or the individual (in the case of the employee) is entitled to capital allowances on it.
- Loan taken out to buy into a partnership or in providing a partnership with a loan. Such interest is a liability of the individual and not of the partnership and therefore is not allowable as an expense in computing the partnership’s profits.
To qualify for relief, you’ll need to demonstrate that the loan was genuinely taken for business purposes. This may include retaining bank loan agreements, invoices, or other documents that verify the loan’s purpose and application.
The limit on income tax reliefs restricts the total amount of qualifying loan interest relief and certain other reliefs in each year to the greater of £50,000 and 25% of ‘adjusted total income’.
When Can Relief Not Be Claimed?
Relief will not be available where the individual who acquired the shares makes a claim for relief under the Enterprise Investment Scheme or the Social Investment Tax relief scheme.
Get in Touch
Have questions about the changes reliefs and if you are eligible? At Arnold Hill, we have the expertise and experience to outline potential planning opportunities for owner managed and family run businesses to use debt in a tax efficient manner. Contact us today to see how we can help you!
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