Deductions: interest: interest paid abroad
Business deduction and deduction of tax
The residence status of the lender does not affect the customer’s right to an interest deduction in computing the profits or losses of their rental business. But where they pay interest to a lender whose usual place of abode is outside the UK, they should normally deduct IT at the basic rate from the payments they make and account for it to HMRC (ITA07/S874 (1)). This is dependent on any relevant double taxation agreements, see below.
Double taxation agreements
Where there is a double taxation agreement between the UK and the country of residence of the lender, it may be possible for the lender to obtain authority from HMRC to have the interest paid without deduction of tax, or under a reduced rate of withholding tax. This will depend on the terms of the double taxation agreement with the country of the lender.
Applications by lenders who are not resident in the UK to receive interest abroad without deduction of tax, or under a reduced rate of withholding tax, should be made to:
LBS DT Treaty Team
Castle Meadow Road
Nottingham NG2 1BA
The borrower can’t apply to pay the interest without deducting tax - it must be the lender. Borrowers must deduct (and pay over to HMRC) the full amount of the basic rate tax unless they have authority from HMRC to deduct less than the full amount. If they pay the gross interest to the non-resident lender without deducting tax, they will still have to pay HMRC the tax they ought to have deducted.
Interest paid at uncommercial rates
Interest paid to a lender not resident in the UK over and above a commercial rate isn’t allowable as a deduction even if it would otherwise qualify (perhaps because the loan was used to buy a rental business property). Generally, HMRC will accept the interest charged by the lender as an allowable deduction where it is paid on an arm’s length loan made on a normal commercial basis.
Take a broad view of what is a reasonable commercial rate. You should not normally seek an adjustment where the payer and recipient are at arm’s length. If interest is payable in the UK on an advance from a foreign bank carrying on a bona fide banking business in the UK through a branch, treat it as if it were interest payable to a UK bank.
If an adjustment is required because the interest is at more than a normal commercial rate, the adjustment is the excess over a reasonable rate, not the whole of the interest.