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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: alternative finance: beneficial loans for employees

Alternative finance arrangements and beneficial loans

Existing legislation provides that a taxable benefit arises when a loan, made by an employer to an employee, carries a rate of interest below the commercial rate of interest - see EIM26101. This is known as a ‘cheap’ loan. The difference between the amount of interest actually paid, and the amount of interest that would be payable at the official rate, represents the taxable benefit and is charged to tax: ITEPA03/S175.

Where the ‘cheap’ loan between the employer and employee is structured by way of a purchase and resale arrangement (CFM44050) or a diminishing shared ownership arrangement (CFM44070), which has the same effect as a conventional low-interest loan, that arrangement will also give rise to a taxable benefit and be charged to tax. This is achieved by deeming a reference to ‘loans’ within the beneficial loans legislation to include an alternative finance arrangement. A reference to ‘interest’ in that legislation includes a reference to an alternative finance return: ITEPA03/S173A. The employer does not need to be a financial institution to offer a benefit equivalent to a cheap loan using a purchase and resale arrangement or a diminishing shared ownership arrangement.

The tax treatment applies to all arrangements entered into on or after 22 March 2006 where an employer offers an employee financing through a purchase and resale arrangement or a diminished share ownership arrangement. For further details of how the beneficial loans legislation applies see EIM26101 onwards.