Taxation of beneficial loan arrangements (480: Appendix 6)
Find out more information on calculations for the taxation of beneficial loan arrangements.
Example showing the calculation of benefits chargeable
The main points are covered in chapter 17, paragraphs 17.27 to 17.30.
The facts on which this example is based are below.
Example
A close company has for some years advanced funds to a director at 3% interest payable quarterly on 31 March, 30 June, 30 September and 31 December by deduction from salary.
The balance on the loan account on 5 April preceding the year of assessment was £29,000. The director repaid £1,000 on 30 June in the year of assessment so that the balance at the end of that year was £28,000.
Part of the loan balance was a loan of £3,000 made in the preceding year to help him buy a share in a partnership.
£20,000 was a loan used to buy his only residence. This loan was taken out immediately after and to top up an endowment mortgage of £20,000 with a building society. Of the remainder of the loan, £2,000 was used to buy a season ticket and the other £4,000 outstanding at the beginning of the year represented the balance of a loan to pay for a holiday.
Of the total repayment of £1,000, £200 was set against the partnership loan, £500 against the house loan, £200 against the season ticket loan and the other £100 against the holiday loan. The appropriate official rate was 10% throughout the year in question.
All the loans are between the same borrower and lender, and all require a ‘cash equivalent’ to be ascertained. The company elects that the loans which can be treated as a single loan are to be so treated.
Consequently the house loan, the season ticket loan and the holiday loan which are ‘non-qualifying’ (see chapter 17 paragraph 17.14) are aggregated (see chapter 17 paragraph 17.27). So for the purposes of calculating the total chargeable benefit there are 2 loans as follows:
| Type | Balance at start | Balance at end |
|---|---|---|
| Qualifying | £3,000 | £2,800 |
| Non-qualifying | £26,000 | £25,200 |
As the total balance outstanding exceeded £10,000 in the year, exemption under S180(1) is not due (see chapter 17 paragraph 17.16. Since the total balance outstanding on the non-qualifying loans exceeded £5,000 in the year, exemption under S180(3) is not due for those loans (see chapter 17 paragraph 17.17).
Interest paid on the partnership loan for the year was
| Date paid | Interest at 3% | Paid |
|---|---|---|
| 30 June | One quarter on £3,000 | = £22.50 |
| 30 September | One quarter on £2,800 | = £21.00 |
| 31 December | One quarter on £2,800 | = £21.00 |
| 31 March | One quarter on £2,800 | = £21.00 |
| Total paid | £85.50 |
Interest paid on the aggregated loan for the year was
| Date paid | Interest at 3% | Paid |
|---|---|---|
| 30 June | One quarter on £26,000 | = £195.00 |
| 30 September | One quarter on £25,200 | = £189.00 |
| 31 December | One quarter on £25,200 | = £189.00 |
| 31 March | One quarter on £25,200 | = £189.00 |
| Total paid | £762.00 |
Example
Liability on the normal ‘averaging’ method (see chapter 17 paragraph 17.29)
A. Partnership loan
(£3,000 + £2,800 ÷ 2) × (12 ÷ 12) × (10 ÷ 100) = £290.00
Minus interest actually paid for the partnership loan = £85.50
Chargeable benefit £204.50
B. Aggregated loans
(£26,000 + £25,200 ÷ 2) × (12 ÷ 12) × (10 ÷ 100) = £2,560.00
Minus interest actually paid for the aggregated loan = £762.00
Chargeable benefit £1,798.00
Total cash equivalent = £204.50 + £1,798.00 = £2,002.50
Liability on the alternative precise method (see paragraph 17.30)
A. Partnership loan
Period
6 April to 30 June (86 days) £3,000 for 86 days at 10% = £70.68
1 July to 5 April (279 days) £2,800 for 279 days at 10% = £214.02
Total = £284.70
Minus interest actually paid for the partnership loan £85.50
Chargeable benefit = £199.20
B. Aggregated loan
Period
6 April to 30 June (86 days) £26,000 for 86 days at 10% = £612.60
1 July to 5 April (279 days) £25,200 for 279 days at 10% = £1926.24
Total = £2,538.84
Minus interest actually paid for the aggregated loan £762.00
Chargeable benefit = £1,776.84
Total cash equivalent = £199.20 + £1,776.84 = £1,976.04
Although the director repaid £1,000 on 30 June, the maximum balances of the non-aggregated and aggregated loans outstanding on that day were £3,000 and £26,000 and these amounts have been taken into account in the alternative precise method of calculation.
The ‘normal averaging method’ of calculation, which would be applied automatically (see chapter 17 paragraph 17.28), operates marginally to the director’s disadvantage. If he considers it worthwhile he could make an election for the ‘alternative precise method’ of calculation (see chapter 17 paragraphs 17.31 and 17.32).
The director will be treated as having paid £2,003 (or £1,977 if an election for the ‘alternative precise method’ is made) interest on the loans in addition to the £847.50 actually paid (see chapter 17 paragraphs 17.36 and 17.37).