Borrowing to lend to your company – what’s the tax position?

If you borrow money to inject into your company, you can claim tax relief for the interest you pay. But not all borrowing or interest qualifies and there are pitfalls that can cause you to lose the tax relief. How can you avoid these problems?

 

Personal business loans and tax relief

If you pay interest on borrowing which you use to support your business, you can claim a tax deduction, but not in all situations. There’s a surprising number of limitations and conditions that must be met relating to you, your company and the type of borrowing.

 

Is it for a qualifying business purpose?

You’re entitled to tax relief on interest you pay on borrowing which you use for a qualifying purpose, specifically to:

  • purchase 5% or more of the ordinary capital of a company which is a close company. Broadly, one controlled by five or fewer individuals. It must also be a trading company, i.e. one where its main activity isn’t owning and managing investments for itself; or
  • lend money to a close trading company for use in its business, i.e. as working capital.

If you borrow to lend to your company you’re only entitled to tax relief on interest you pay until the company repays what it owes you. For tax efficiency use repayments from your company to repay your borrowing. As personal credit card and overdraft interest doesn’t qualify for tax relief, use a company credit card or overdraft instead.

Not sure how to proceed. Please come and talk to the team and we can take you through the tax position of a range of borrowing options.

 

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