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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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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 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 new 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.