INTM601640 - Transfer of assets abroad: The benefits charge: Examples of amount or value of loan

One of the most common examples of a benefit involves loans of one form or another. These loans can take the following forms:

• interest free loans
• loans made charging interest at a rate below commercial rates
• loans made charging interest at a commercial rate
• loans made charging interest which remains unpaid
• back-to-back arrangements

Interest free loans are considered to be within the provisions, the charge being calculated by reference to the amount of interest forgone by the lender. This position was challenged in the courts where it was argued that in effect where a loan was repayable on demand there was no benefit. The judges disagreed with this and said that the focus needed to be not on the making of the loan but on the Trustees successive acts in not calling the loan in (Cooper v Billingham and Fisher v Edwards 54 TC 139). Similarly, where there are loans at interest rates lower than those that would be charged by banks or other commercial lenders a benefit may arise.

In the case of an interest free loan made to the individual, the amount of the benefit would normally be considered to be equivalent to the interest payable at a commercial rate on a similar loan from an unconnected third party. For this purpose, we treat the ‘official rate’ of interest as being the appropriate rate to use. Where interest is paid but at less than commercial rates, the amount of the benefit will be that interest payable at a commercial rate less the interest paid.

A loan made to an individual for full commercial consideration is a ‘benefit’, but such a loan would in practice normally be regarded as a nil benefit, and therefore have no taxable value. If the interest payable on the loan is not paid, consideration should be given as to whether the ‘unpaid’ interest in each year should be the amount of benefit in each year. Regard should be had to the circumstances under which the interest is unpaid. For example, has the payment of interest been waived? If repayment of interest (or capital) is waived, then this will be regarded as a benefit received by the individual for the year in which waiver takes place.

There may be instances of so called ‘back-to-back’ arrangements which should be carefully considered. For example, an individual who is a beneficiary of a trust may borrow money from a bank at commercial rates of interest. The trustees may deposit substantial funds with the bank (lender) as collateral for the loan. The arrangements may mean that repayments of capital and interest on the bank loan are rolled up and, on maturity, the loans are either renegotiated or replaced by larger loans from other banks.

The result is that the individual, although legally responsible for the repayments of capital and interest payments, has had, perhaps for many years, the benefit of substantial loans without a cost. In such circumstances, the value of the benefit may be considered on the basis that the loans were interest free and the benefit arrived at as referred to above.

The above assumes that monies made available to the individual were in fact by way of loan and, in appropriate cases, evidence of a loan having been made should be obtained. If, on enquiry, it transpires that the payment was not a loan, then the payment should be treated as a cash payment, as referred to earlier.

From 6 April 2017, rules were introduced in ITA07/S742C regarding the calculation of the value of the benefit relating to loans. Guidance on this can be found at INTM603640.