INTM603640 - Transfer of assets abroad: Non-domiciled and deemed domiciled settlors from 6 April 2017: Valuation of benefits - payment by way of loan
The value of the benefit conferred on a person by way of a loan, for each tax year in which the loan is outstanding, is the amount (if any) by which
- the amount of interest that would have been payable in that year on the loan, if interest had been payable on the loan at the official rate of interest,
exceeds
- the amount of interest actually paid by the person in that year on the loan.
See also INTM601640.
The official rate of interest is the rate applicable from time to time under FA1989/S178.
It should be noted that any interest due under the loan must be paid in the year in order for it to be deducted from the amount of interest due under the official rate. If the interest is deferred or added to the capital of the loan, it will not be treated as having been paid, and no deduction from the interest due at the official rate will be available.
Example
Racheal is the beneficiary of a non-resident discretionary trust. She receives an interest-free loan from the trustees on 6 April 2018 of £100,000. The loan is repayable on demand.
Assuming the official rate of interest applying during the year 2018 - 2019 is 2.5% (and that it does not change in 2019 - 2020 and 2020 - 2021), the value of the benefit that she received during 2018 - 2019 will be £2,500.
If on 6 April 2019 the trustees agree to amend the terms of the loan such that Racheal pays interest of 2% per annum going forward, the value of the benefit that Racheal received in 2019 - 2020 will be £500 (£2,500 - £2,000) provided Racheal pays the interest during the year.
If on 6 April 2020 the trustees increase the rate of interest on the loan to 3% the value of the benefit received by Racheal will be nil (£2,500 - £3,000) as, assuming she pays the interest during the year, the interest paid exceeds the official rate.
See INTM601400 onwards for details of the benefits charge prior to 6 April 2017.