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Relief is available on borrowings to fund a loan to a close company. However, relief is denied if the funds are returned to the borrower.

Example:
Christopher is a director of a close company in which he owns 80% of the shares. Three years ago he lent the company £50,000, funded from his savings.

Chris now wishes to extend his home and wants his money back. He knows that he can obtain interest relief for a loan to a company but not for a loan to extend his home. He therefore borrows £50,000 and lends it to the company so that the company can repay his original £50,000.

However, he has fallen into the return of funds trap and interest relief is denied as the purpose of the loan is to return funds to him.