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Where Taxpayers and Advisers Meet

Personal loan tax deduction

Incredulum
Posts:2795
Joined:Thu Dec 03, 2009 5:35 pm
Personal loan tax deduction

Postby Incredulum » Thu Nov 16, 2023 12:41 pm

An individual 'X' owns a company which is to buy a house.

The funding is coming from an acquaintance of the individual 'A' and is an interest-bearing loan.

X will borrow the cash from A and will then lend it to his company. X will obtain an income tax deduction (at higher rate). The company will accrue interest to X which will not be paid. A will have a charge over the shares of the company and the house.

Questions, please:

1. Will it be possible to repay the principal of the loan without repaying the interest?
2. Is there any problem with A having security over the house and company, in terms of justifying that it is X who is the borrower not the company?
2. Any other issues?

Thank you.

bd6759
Posts:4239
Joined:Sat Feb 01, 2014 3:26 pm

Re: Personal loan tax deduction

Postby bd6759 » Thu Nov 16, 2023 2:25 pm

1.accrued and paid normally mean the same thing

2. There is no relationship between A and company. A needs security from X ( maybe over the shares).

2. You mean 3. What IT deduction will X get when he lends to the company?

Incredulum
Posts:2795
Joined:Thu Dec 03, 2009 5:35 pm

Re: Personal loan tax deduction

Postby Incredulum » Fri Nov 17, 2023 10:41 pm

1. Accrued means CR Creditor, DR Income Statement.
Paid means CR Cash, DR Creditor

Why do you think they are the same thing?

3. Qualifying loan interest - see s392 ITA 2007: Loan to buy interest in close company [F1etc]
(1)This section applies to a loan to an individual that is used in one or more of the ways specified in subsection (2).
(2)The ways are—
(a)acquiring any part of the ordinary share capital of a close company that is not a close investment-holding company,
(b)lending to such a company money which is used wholly and exclusively
(i)for the purposes of the business of the company, or
(ii)for the purposes of the business of any associated company of the company which is also a close company that is not a close investment-holding company, or...

Am I missing something?

bd6759
Posts:4239
Joined:Sat Feb 01, 2014 3:26 pm

Re: Personal loan tax deduction

Postby bd6759 » Sat Nov 18, 2023 5:02 am

This is a tax forum. If interest is accrued it is “normally” regarded as paid for most tax purposes. I used “normally” intentionally.

You said
X will borrow the cash from A and will then lend it to his company. X will obtain an income tax deduction.
No mention of interest.

X may get a deduction for interest paid, but needs to consider all of ss392-394.


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