INTEREST RELIEF ON MONEY LENT TO A CLOSE COMPANY, INCLUDING
My client has for many years personally owned a portfolio of residential rental properties. During 2019/20, she mortgaged one of the properties in order to finance significant refurbishment of the portfolio. As a result of scaling down her refurbishment plans, she has borrowed significantly more than she needs for her own portfolio. She also owns a limited company that has its own modest portfolio of properties. She has used the part of the mortgage that is not needed in her personal portfolio to make a loan to the company to enable it to carry out maintenance and alterations to its properties. What relief is available in respect of the loan?
There should be no difficulty with referring to the personal property portfolio a loan that has been taken out for the upkeep of the properties in it. As well as interest on the loan, there is also provision for relieving the mortgage arrangement fee as an incidental cost of obtaining finance (Section 58 ITTOIA 2005). However, both the interest and the incidental costs are subject to the removal of relief from higher rates of tax, so in 2019/20, 25% of those costs are treated as an expense in the personal property business. The remaining costs might form the basis of an income tax reducer at Basic Rate (depending on the overall result for the property business and the availability of any property losses brought forward into the year).
Interest payable to the bank in respect of the money that was lent to the company is eligible for relief under Chapter 1 Part 8 Income Tax Act 2007 (“qualifying interest”) as long as the company has a qualifying business. We can be sure that the company’s business qualifies if it is letting properties on commercial terms to unconnected parties. This relief is not given as an expense of any business the taxpayer has but as a reduction of her taxable income for the year (S.383(4) ITA). The relief is only for the interest; that is, there is no relief for the costs associated with obtaining the finance.
In light of the higher rate restriction in the personal property business and the availability of relief for interest being paid on the money lent to the company, the possibility of getting some relief for the money left in the personal business as well as some relief for the money lent to the company, might look very attractive. The proposition also seems very reasonable and doesn’t appear to conflict with the comments by HMRC ) which say that the legislation “prevents relief being given twice”. However, the legislation they are commenting on makes it clear if there is any relief claimed in a property business for interest on a loan, then no interest on the same loan may be relieved as qualifying interest in the same tax year (S.387(3)&(4) ITA 2007).
So, this client has the freedom to choose whether or not to claim relief for qualifying interest in respect of the mortgage proceeds used to fund her company but, if she does, none of the interest on that loan may be relieved in her own property business.
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