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HMRC internal manual

Capital Gains Manual

Capital payments - non-payment of interest – up to 5 April 2017

The trustees may make a loan to a beneficiary at a commercial rate but the beneficiary doesn’t pay the interest. The non-payment of interest may give rise to a benefit that needs to be valued.

Formal waiver

If the trustees have formally waived the interest there is a capital payment at the time of the waiver equal to amount of the interest waived.

Interest not collected or pursued

If the payment of interest has been deferred the valuation of any benefit will depend on the terms of the loan. If the loan agreement provides for the payment of interest on unpaid interest, which may be capitalised into the value of the loan, there is no benefit and no capital payment. If the interest has not been collected either as a result of a formal decision to defer payment or by not pursuing payment there is a benefit and a capital payment.

The benefit will continue until one of the following events occurs:

  • The beneficiary pays the interest.
  • The trustees waive the interest and a further benefit arises as above.
  • The trustees and the beneficiary agree that a commercial rate of interest should be paid on the unpaid interest from a particular date. The benefit ceases on that date. The amount of the benefit is calculated by treating the unpaid interest as an interest free loan. The amount of the loan is cumulative over the period the interest is unpaid. In many cases the amounts involved are likely to be small but can mount up over period of years.

Example: non-payment of interest

Amount of loan £1,000,000

Interest payable 5%

No interest paid for 3 years when half total interest deferred is waived by the trustees.

Year 1

Interest unpaid for year £1,000,000 @ 5% = £50,000

Benefit £50,000 @ 5% = £2,500

Year 2

Interest unpaid for year £1,000,000 @ 5% = £50,000
Plus interest deferred Year 1   £50,000
Total interest deferred   £100,000

Benefit £100,000 @ 5% = £5,000

Year 3

Interest unpaid for year £1,000,000 @ 5% = £50,000
Plus interest deferred Year 2   £100,000
Total interest deferred   £150,000

Benefit £150,000 @ 5% = £7,500

There is also a benefit of £75,000 when half total interest deferred is written off.