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This helpsheet gives you information to help you fill in box 5 in the ‘other tax reliefs’ section on page Ai 2 of the additional information pages.
Qualifying loans and alternative finance arrangements
Tax relief is available for interest on loans where the borrowed money is used for certain specific purposes.
You can also claim relief for alternative finance payments paid on a qualifying alternative finance arrangement on the same basis as someone claiming relief for interest paid on a loan.
You may be able to claim relief for interest paid or for alternative finance payments where the loan or alternative finance arrangement is used to:
- buy ordinary shares in, or lend money to, a close company in which you own more than 5% of the ordinary share capital on your own or with associates
- buy ordinary shares in, or lend money to, a close company in which you own any part of the share capital and work for the greater part of your time in the management and conduct of the company’s business, or that of an associated company
- acquire ordinary share capital in an employee controlled company if you are a full-time employee – we regard you as a full-time employee if you work for the greater part of your time as a director or employee of the company or of a subsidiary in which the company has an interest of 51% or more
- acquire a share or shares in, or to lend money to, a co-operative which is used wholly and exclusively for the purposes of its business
- acquire an interest in a trading or professional partnership (including a limited liability partnership constituted under the Limited Liability Partnership Act 2000, other than an investment limited liability partnership)
- to provide a partnership, including an limited liability partnership, with funds by way of capital or premium or in advancing money, where the money contributed or advanced is used wholly for the partnership’s business - if the partnership is a property letting partnership, read information about the residential property finance costs restriction
- buy equipment or machinery for use in your work for your employer, or by a partnership (unless you’ve already deducted the interest as a business expense) – relief is only available if you, or the partnership, were entitled to claim capital allowances on the item(s) in question – if the equipment or machinery was used only partly for your employment, or only partly for the partnership business, only the business proportion of the loan interest or alternative finance payments qualifies for relief)
You cannot claim relief for interest on overdrafts or credit cards.
If you’re not sure whether you can claim relief for any interest paid or alternative finance payments, ask HMRC or your tax adviser.
Residential property finance costs restriction
If you are claiming tax relief for interest payable on a loan or alternative finance arrangement to provide funds to a partnership, then relief for the interest is restricted to the extent that the partnership uses those funds for any part of its property business that consists of residential properties.
Where those funds are used for residential property, for the tax year 6 April 2019 to 5 April 2020 you can only claim relief for 25% of the cost of getting a loan, or alternative finance, and 25% of any interest on such a loan or alternative finance payments. The remaining 75% is used to calculate a reduction in your income tax.
For example, if you incurred £4,000 in interest on such a loan, include £1,000 (25% of £4,000) in box 5 (qualifying loan interest payable in the year) in the bottom half of page Ai 2 and the remaining £3,000 in box 12 (non-deductible loan interest from investments into property partnerships not included in ‘qualifying loan interest payable in the year’). This will be used to calculate the reduction in your income tax.
For more information on the residential property finance costs restriction, see changes to tax relief for residential landlords.
For more information on what is meant by residential property, see the Property Income Manual.
Limit on Income Tax reliefs
The limit on Income Tax reliefs restricts the total amount of qualifying loan interest relief and certain other reliefs in each year to the greater of £50,000 and 25% of ‘adjusted total income’.
For more information about the limit on Income Tax reliefs, read Helpsheet 204 Limit on Income Tax reliefs.
You should make sure that you get (and keep) from your lender a certificate of interest or alternative finance payments you’ve paid during the year. We may ask to see it.
Beneficial loan interest
If you receive a low-interest or interest-free qualifying loan from your employer you may also be able to claim relief for any benefit taxable on you. For more information see expenses and benefits: loans provided to employees or ask HMRC or your tax adviser.