CG38654 - Capital payments – loans – from 6 April 2017
Capital payments – loans – from 6 April 2017
The provision of loans legislation is at S97A TCGA 92 and S742C ITA 07. This applies to capital payments or benefits received in 2017-18 and subsequent tax years. The value of the benefit conferred on a person by way of a loan is, for each tax year in which the loan is outstanding, the amount (if any) by which: (a) the amount of interest that would have been payable in that year on the loan if interest had been payable on the loan at the official rate, exceeds (b) the amount of interest (if any) actually paid by the person in that year on the loan.
The official rate of interest is the rate applicable from time to time under S178 FA 1989. It should be noted that any interest due under the loan must be paid in the year in order for it to be deducted from the amount of interest due under the official rate. If the interest is deferred or added to the capital of the loan it will not be treated as having been paid and no deduction from the interest due at the official rate will be available.
Example
Rachael is the beneficiary of a non-resident discretionary trust. She receives an interest free loan from the trustees on 6 April 2018 of £100,000. The loan is interest free and repayable on demand.
Assuming that the official rate of interest applying during 2018/19 is 2.5% (and that this does not increase in 2019/20 and 2020/21) the value of the benefit that she received during 2018/19 will be £2,500.
If, on 6 April 2019, the trustees agree to amend the terms of the loan such that Rachael pays interest at 2% per annum going forward the value of the benefit that she received in 2019/20 will be (£2,500 - £2000) £500 provided that Rachael pays the interest during the year.
If on 6 April 2020 the trustees increase the rate of interest that they charge on the loan to 3% the value of the benefit received by Rachael will be (£2,500 - £3,000) Nil, as assuming that she pays the interest the interest paid exceeds the official rate.