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HMRC internal manual

Employment Income Manual

The benefits code: beneficial loans: calculating the cash equivalent: what interest paid is taken into account: interest capitalised

Section 175(3)(b) ITEPA 2003

When calculating the cash equivalent of the benefit of a beneficial loan (see EIM26200) for any year, interest paid on it can be deducted provided all of the following conditions are satisfied:

  • the interest must have actually been paid
  • it must have been paid for the year of assessment
  • it must have been paid under an obligation to pay interest that existed during that year.

It does not have to be paid in the year of assessment to qualify.

The requirement that interest must have been paid under an obligation if a deduction is to be given for it, is not stated in so many words in the legislation. This is because it isin the nature of interest that it cannot arise except under an obligation. Thus a payment made voluntarily cannot, by definition, be interest. For more information on the meaning of “interest” see Westminster Bank v Riches (48TC159).


EIM26251 where interest is capitalised.

EIM26252 where interest is paid half yearly.

EIM26255 where interest is due but not paid until afterassessment is final.

EIM26257 where late payments of so-called interest where noobligation to pay interest existed during the year of assessment.