Limitations on income tax relief

[ltd101]

When an individual lends money to a business I understand that they are able to claim back relief via income tax relief if they are borrowing funds from another source e.g personal mortgage. I gather from 2013-4 HMRC have capped the max relief as:

50k or 25% of adjusted total income

My question is is that the total amount of interest than can be claimed back OR is it the amount of money that you can claim interest relief on for lent funds?

e.g if i lent 100k (borrowing funds at 3% personally as a 50% taxpayer) can i only claim relief on

a/ 50k of the 100k i have lent?
b/ does the ruling meant that I would be using just 1.5k of my 50k allowance by lending 100k?

Any help appreciated and if anyone has a link to this new legislation I would be really interested to read any links

Thanks

[AvocadoK]

My question is is that the total amount of interest than can be claimed back OR is it the amount of money that you can claim interest relief on for lent funds?

It is the amount of the interest that is restricted:

a/ 50k of the 100k i have lent?
b/ does the ruling meant that I would be using just 1.5k of my 50k allowance by lending 100k?

Answer is b.

I am assuming that the business you are lending to is a limited company. There is no restriction on the interest if you carry on the business personally. The restriction would then apply to the loss of the business.


Draft legislation is on HMRC website:

http://www.hmrc.gov.uk/budget-updates/1 ... al-tax.pdf

[ltd101]

This is exactly what I was looking for, thank you very much, yes it would be related to lent funds to an ltd.

Finally, can you also clarify what you meant by this pls:

" There is no restriction on the interest if you carry on the business personally."

are you suggesting you can get interest relief in some way without setting up an ltd?

[AvocadoK]

Yes, it is always possible to carry on a business in one's personal name, or as a partnership, rather than through a ltd co. I gathered from earlier posts that you were intending to use a ltd co, as this will shelter profits at 20% corporation tax, rather than be taxed at higher rate income tax. This is still fine. My comment was just made for completeness.

[ltd101]

Thanks. One of the biggest advantages I have noticed about the LTD method is that if a property needs a good deal of capital expenditure on it (new bathroom/kitchen etc) then if seems advantageous to use an ltd as well as this is all part of the lent funds (therefore eligible for interest relief). Whereas if I just bought the property in my personal name then capital expenditure specifically is never eligible to offset against rental income but only relevant for CGT calculation.

[AvocadoK]

I trust you are are that capital expenditure is only ever allowable when calculating the capital gain on disposal. That's the same whether it is in a ltd co or held personally.

[ltd101]

I agree that capital exp can NOT be offset against rental income in either ltd or personal format. But income tax relief is available on all funds lent to an ltd.

e.g owner lends ltd 100k. property company buys property for 80k & spends 20k on capex

owner is entitled to claim income tax relief on all 100k lending

vs personal purchase, only interest on 80k (ie not capex ) is eligible to be offset against rental income