Tax relief is available on money borrowed to buy equipment or machinery for use in a partnership, provided that the items in question qualify for capital allowances.
It may therefore be advisable to borrow money to buy equipment and machinery and to use savings for a non-qualifying purpose to maximise the tax relief available.
It should be noted that the availability of certain income tax reliefs is capped at the greater of £50,000 and 25% of income. Relief for qualifying loan interest is subject to the cap, which also applies to loss reliefs.
Example:
Mo and Jake are in partnership as handymen and need to buy various tools for the partnership.
Mo has £2,000 of savings. He wants to buy the tools and also take his family on holiday but needs to borrow some money to do both.
He uses the savings to fund the holiday and takes out a £2,000 loan to buy the tools for the partnership. By using the savings to fund the holiday and the loan to fund the tools he is able to claim tax relief on the loan interest. If he had done it the other way round, he would be denied a deduction for the interest.
This is a sample tip taken from our 136 page guide:
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