PIM2064 - Deductions: interest: interest paid abroad

Business deduction and deduction of tax

The residence status of the lender does not affect the customer’s right to an interest deduction in computing the profits or losses of their property business. But where they pay interest to a lender whose usual place of abode is outside the UK, they should normally deduct IT at the basic rate from the payments they make and account for it to HMRC (ITA07/S874 (1) and (2)) - see the Savings and Investments Manual from page SAIM9070. This is dependent on any relevant double taxation agreements, see below.

Double taxation agreements

Where there is a double taxation agreement between the UK and the country of residence of the lender, it may be possible for the lender to obtain authority from HMRC to have the interest paid without deduction of tax, or under a reduced rate of withholding tax. This will depend on the terms of the double taxation agreement with the country of the lender.

Applications by lenders who are not resident in the UK to receive interest abroad without deduction of tax, or under a reduced rate of withholding tax, should be made to the Large Business DT Treaty Team in Nottingham.

The borrower cannot apply to pay the interest without deducting tax - it must be the lender. Borrowers must deduct (and pay over to HMRC) the full amount of the basic rate tax unless they have authority from HMRC to deduct less than the full amount. If they pay the gross interest to the non-resident lender without deducting tax, they will still have to pay HMRC the tax they ought to have deducted.

Interest paid at uncommercial rates

Interest paid to a lender not resident in the UK over and above a commercial rate is not allowable as a deduction even if it would otherwise qualify (perhaps because the loan was used to buy a property for the property business) as it would not meet the 'wholly and exclusively' test - see from page PIM2000. Generally, HMRC will accept the interest charged by the lender as an allowable deduction where it is paid on an arm’s length loan made on a normal commercial basis.

Take a broad view of what is a reasonable commercial rate. You should not normally seek an adjustment where the payer and recipient are at arm's length. If interest is payable in the UK on an advance from a foreign bank carrying on a bona fide banking business in the UK through a branch, treat it as if it were interest payable to a UK bank.

If an adjustment is required because the interest is at more than a normal commercial rate, the adjustment is the excess over a reasonable rate, not the whole of the interest - ie the proportion that can be accepted as wholly and exclusively for the purposes of the property business.