The benefits code: beneficial loans: order of repayment of successive loans
Difficulties can arise where the loan consists of a series of interest-free or cheap loans, some or all of which will fall to be aggregated to calculate the chargeable benefit (see EIM26180).
In particular, it is often difficult to allocate the payments made by the employee towards the redemption of the successive loans, especially if the various loans carry different rates of interest. This is because, in general, each loan constitutes a separate debt.
Any points of difficulty should be considered by an Inspector, in the light of the guidance that follows and that at EIM26261.
Broadly, the general practice as set out at CT6662 should be followed. Thus, where the employee makes a repayment that does not extinguish his or her total indebtedness, he or she can specify when making the payment which particular loans should be treated as extinguished or reduced by the payments. If the borrower shows that he or she has informed the lender as to the way in which particular payments should be allocated you can accept that that allocation has been followed.
If the borrower does not say how the repayments are to be allocated the right of allocation passes to the lender, who need not necessarily make an immediate allocation. Once the lender has made an allocation he or she should, however, tell the borrower how this has been done so that the borrower knows where he or she stands as regards interest charges. When the lender has decided on the allocation and told the borrower the allocation cannot be changed. The notification to the borrower can be formal or informal. It can, for example, simply be shown by the way the lender tells the borrower of the various loans still outstanding.
If there is a legal dispute about the amounts outstanding, the lender has until the last moment in which to make the allocation.
For example, this could be when or he or she gives evidence in the Court hearing (Cory Bros and Co v Mecca Turkish SS (Owners), The Mecca, 1897, Law Reports, Appeal Cases, House of Lords, 286). Failing any allocation, the Court would first allocate against the loan bearing interest at the highest rate. As between debts of equal weight the allocation would be against the oldest debt.
The guidance given above can be summarised as follows:
- repayments made by the borrower should be allocated by the lender in accordance with the borrower’s expressed wishes,
- if the borrower expresses no wish, the lender may allocate the repayments as he or she thinks fit and advise the borrower when he or she has done so,
where the borrower has expressed no wish and the lender has made no allocation, you can assume that the allocation has been made:
- firstly, against the debt bearing interest at the highest rate and
- secondly, as between debts of equal weight, against the earliest debt.
It follows that where it is not clear how any repayments of loans have been dealt with, the Inspector should seek evidence of allocation from either the borrower or lender. If necessary, the Inspector should ask to see a detailed copy of the loan account as shown in the lender’s books and records.
See EIM26261 for the rule in Clayton’s case.