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HMRC internal manual

Savings and Investment Manual

Relief for interest paid: interest in a close company: ‘material interest conditions’

Material interest conditions

ITA07/S393 (4) sets out the ‘material interest conditions’ referred to in SAIM10220. These are that when the interest is paid the individual has a material interest in the company, and if the company exists wholly or mainly for the purposes of holding investments or other property

  • either the full-time working conditions (SAIM10230) are met, or
  • no property held by the company is used as a residence by the individual.

Meaning of ‘material interest’

ITA07/S394 defines material interest. A relevant person has a ‘material interest’ if they meet Condition A or B.

A ‘relevant person’ is

  • an individual, either alone or with one or more associates,
  • or an associate of the individual, with or without other associates.

Condition A is that the relevant person must be the beneficial owner of, or able, directly or through the medium of other companies or by any other indirect means, to control, more than 5% of the ordinary share capital (as defined in CTM60180) of the company.

Condition B is that the relevant person must possess, or is entitled to acquire such rights as would, in the event of the winding up of the company or in any other circumstances, give an entitlement to receive more than 5% of the assets which would be available for distribution among the participators.

For relief under ITA07/S392 to be due, the ‘material interest’ must be possessed when the interest on the loan is paid. It follows that the date when the interest is paid is the date at which Condition A or Condition B are to be applied.

If an individual borrows to acquire an interest which is less than a material interest, say, for example, 3% of the ordinary share capital, but with a second loan acquires, say, another 3%, he or she may claim relief for the interest paid on both loans after his interest in the company became a ‘material’ one.

Meaning of associate

ITA07/S395 gives the meaning of ‘associate’ as being, in relation to an individual:

  • any relative or partner of the individual
  • the trustee or trustees of a settlement in relation to which the individual is, or any relative of his or her (living or dead) is or was, a settlor,


  • where the individual is interested in any shares or obligations of the company which are subject to any trust, or are part of the estate of a deceased person, the trustee or trustees of the settlement concerned or, as the case may be, the personal representative of the deceased.

In relation to any loan made on or after 27 July 1989, where the individual has an interest in shares or obligations of the company as a beneficiary of an employee benefit trust, the trustees shall not be regarded as associates of that individual by reason only of that interest, unless the individual and/or his or her associates owns, or is able to control, more than 5% of the ordinary share capital of the company.

‘Associate’ here takes its meaning from ITEPA03/S549 (4). See EIM26110 for more on employee benefit trusts.