HMRC internal manual

Savings and Investment Manual

Relief for interest paid: interest in excess of a reasonable commercial rate

Interest paid in excess of a reasonable commercial rate

This guidance applies to interest paid on or after 9 October 2007

ITA07/S384 was amended by FA08/SCH22/PARA21 to counter avoidance arrangements which relied on ‘front-loading’ the interest payable on a loan.

In such arrangements the full amount of the interest payable during the term would typically be charged and paid within a short time of the commencement of the loan. The amount of interest relief claimed in the first year would therefore be far higher than the amount normally claimed on a loan due to this ’front-loading’.

ITA07/S384 counters this by denying the interest relief available to the extent that it ‘exceeds a reasonable commercial amount of interest on the loan for the relevant period’ 

For guidance on ‘reasonable commercial amount of interest’ refer to SAIM10090.

The ‘relevant period’ is either the tax year if the loan has existed throughout the year, or the amount of time in the tax year that the loan is in existence.

The rate of interest paid in the year is calculated by looking at the interest paid from the beginning of the tax year, or the date the loan started (if later), to the end of the current tax year, or to the date in the tax year the loan finished. This calculation only looks backwards, any interest due to be paid in any following period is ignored.

The calculation adds the interest paid in the current year to the amount of interest relieved in previous periods and calculates the interest over the period the loan has existed to date.

Only interest relieved in previous periods is considered here. So if we are considering the interest paid in year 2 of a loan and, say, £10,000 interest was paid in year 1 of which only £2,000 attracted relief, then only £2,000 is added to the interest paid in year 2 for the purposes of the calculation.