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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: connected parties: late interest: examples

Late paid interest: examples

Example 1

TF Ltd, a close company, borrows from Sarah Bright, a director and majority shareholder.

Interest of £2,000 accrues in the year to 31 March 2009, but is not paid until 5 November 2010.

Sarah is an individual and so is not within the loan relationship rules. She won’t be taxed until the interest is received, in 2010/11.

TF Ltd has an entry in its accounts to 31 March 2009 for the interest debit. Without CTA09/PT5/CH8, there is nearly a 2-year gap between TF Ltd getting relief, and Sarah Bright being taxed on the receipt of that same interest.

Applying CTA09/S375, TF Ltd does not get relief until it pays the interest; in the accounting period to 31 March 2011.

Example 2 - rolled up interest

JK Ltd borrows £100,000 from Ibes NV, its parent in the Netherlands Antilles, for a 5-year term. Compound interest of 6% per annum is payable, but the agreement allows it to be rolled up and paid as a lump sum at the end of Year 5.

JK Ltd and Ibes NV are connected.

Ibes NV is not within the loan relationships legislation.

JK Ltd’s accounts will show the interest accruing each year under the amortised cost basis.

Year Interest accrued Interest allowed as a debit
1 £6,000 None - still unpaid at the end of Year 2
2 £6,360 None - still unpaid at the end of year 3
3 £6,742 None - still unpaid at the end of Year 4
4 £7,146 £7,146 - paid by the end of Year 5
5 £7,575 £26,677 - (£7,575 for the year, and £19,102 paid relating to earlier years)