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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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The benefits code: beneficial loans: averaging method: calculation of the cash equivalent step-by-step

Section 182 and Section 186 ITEPA 2003

The step-by-step calculation of the cash equivalent of a beneficial loan using the averaging method (see EIM26210) is as follows.

Step 1

  1. Find the maximum amount (see EIM26212) of the loan outstanding on:
  • 5 April preceding the year of assessment, or
  • if the loan was made during the year, the date on which it was made.
  1. Find the maximum amount of the loan outstanding on:
  • 5 April within the year of assessment, or
  • if the loan was repaid during the year, the date on which it was repaid.
  1. Add together the maximum amounts found at 1 and 2, and divide the result by two. This is the average loan.

 

Step 2

Calculate the average official rate of interest for the period covered in step 1. If the rate changed during the period of the loan:

  1. multiply each official rate by the number of days when it was in force
  2. add these figures together and
  3. divide the result by the number of days in the period.

 

Step 3

Multiply the average loan (step 1) by the average official rate of interest (step 2) and multiply by the number of whole months (see EIM26217) for which the loan was outstanding in the year, then divide the result by twelve.

Formula

This calculation is expressed by the formula:

A x I x M/12

where:

A is the result of step 1

I is the result of step 2 and

M is the number of whole months during which the loan was outstanding.

Finally, deduct any interest that was paid by the employee in respect of the loan for that year.

See EIM26300 for a list of examples showing the averaging method of working out the cash equivalent of a beneficial loan.

A loan used directly or indirectly to replace another loan (Section 186 ITEPA 2003) is treated as the same loan for the purposes of step 1 above if the replacement loan was either:

  • a further employment related loan, or
  • in the same tax year or within 40 days of the end of it, was itself replaced directly or indirectly by a further employment related loan.

A further employment related loan is a loan the benefit of which is obtained by reasonof employment (see EIM26113) with either:

  • the person who is the employer in relation to the loan replaced, or
  • a person who is connected with that employer.