The benefits code: beneficial loans: calculation of the cash equivalent: example
Section 182 ITEPA 2003
This example shows how to calculate the cash equivalent of a beneficial loan using the averaging method (see EIM26210), and how to calculate the average official rate for part of a year.
A director has an interest-free loan from his company. The amount outstanding at the previous 5 April was £20,000. He makes regular repayments until 20 August, when he repays the amount then outstanding of £16,000. The averaging method of calculation applies as follows (the official rates for sterling loans are, for this example, 4.5% from 6 April to 5 July and 5.5% thereafter).
Step 1 - calculate the average amount of the loan outstanding.
|Maximum amount outstanding on previous 5 April||£20,000|
|Maximum amount outstanding on 20 August||£16,000|
|Add together||£36,000||divided by 2 =||£18,000|
Step 2 - calculate the average official rate for the period 6 April to 20 August (both dates inclusive).
|6 April to 5 July =||91 days||at 4.5%|
|6 July to 20 August =||46 days||at 5.5%|
Therefore the average official rate is:
|91/137||x 4.5%||add||46/137||x 5.5%||=||4.83%|
Step 3 - calculate the amount of interest payable at the official rate for the period for which the loan was.
|(£18,000||x 4.83%||x 4) (note) / 12||=||£289 (rounded down)|
Note: 4 is the number of whole months during which the loan was in existence in the year of assessment, see EIM26217).
Finally, deduct any interest paid by the employee from the £289 that is the cash equivalent of the loan benefit.