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HMRC internal manual

Capital Gains Manual

Capital payments - interest free loans

The benefit of an interest free or low interest loan is equal to the interest payable at a commercial rate on a similar loan from an unconnected third party.

Rate of interest

The rate to use is the “official rate” that the Treasury specifies for the purposes of the employment-related loan charge in ITEPA03/S175. See EIM26103 and EIM26104 for loans denominated in sterling. There are also official rates for loans denominated in Swiss francs and Japanese yen. See EIM26106. For other currencies it is the commercial rate of interest for a loan on similar terms in that currency.

Loans repayable on demand

Many loans from trustees are repayable on demand. This type of loan was considered in Cooper v Billingham (74 TC 139). The taxpayer argued that the loan was of negligible value because they could be called on to repay it at any time. The court did not agree and accepted HMRC’s argument that the benefit of the loan accrued every day that it was not called in. Therefore the benefit accrues from day to day and at the end of the tax year it should be possible to calculate the benefit by reference to the appropriate rate of interest.

Loans for a fixed term

If the loan is for a fixed term the benefit should be valued at the date the loan is made. Also the capital payment should be treated as received on that date even if the loan is to be repaid in a later tax year.

Retrospective payment of interest

A beneficiary who has received an interest free loan may pay a commercial rate of interest retrospectively and then claim they have not received a capital payment. HMRC do not consider it possible to alter the terms of a transaction retrospectively or create a new relationship of debtor/creditor retrospectively. In fact if a beneficiary pays interest for a period when it was not due they may have inadvertently brought themselves within the scope of TCGA92/S86 by providing property to a settlement in which they have an interest.