CFM35820 - 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 2019, but is not paid until 5 November 2020.

Sarah is an individual and so is not within the loan relationship rules. She will not be taxed until the interest is received, in 2020/21.

TF Ltd has an entry in its accounts to 31 March 2019 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 2021.

Example 2 - rolled up interest

JK Ltd borrows £100,000 from Ibes NV, its parent in the Netherlands Antilles, for a 5-year term. It does this for an accounting period ended 31st October 2010. The loan was refinanced in October 2014, before the FA15 changes had effect.

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.

At this point in time, JK Ltd and Ibes NV are connected under the old rules (CTA09/S374).

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)

Changes made by FA15

FA15/S25 limited the cases of connection to which the late interest rules apply. In particular, it removed the cases where there is connection through control or connection through a major interest. Please see CFM35985 for information.