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HMRC internal manual

Savings and Investment Manual

HM Revenue & Customs
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Relief for interest paid: interest in a close company: recovery of capital

The ‘capital recovery condition’

The provisions described in SAIM10010 to SAIM10090 and SAIM10210 are modified if, at any time after applying the borrowed money, the individual recovers any capital from the company but does not use it to repay his or her own borrowing. If he or she does so use it, the interest paid and the relief claim are reduced without any need for a special rule.

ITA07/S406 provides that the claimant is to be treated as if he or she had used the capital recovered to repay his or her own borrowing, whether or not the claimant actually repaid it. The eligible interest paid by the claimant is reduced by an amount equal to interest on the capital recovered, and ceases to qualify for relief from the date the capital was recovered. If only part of the borrowing qualified, the capital recovered is to be set primarily against that part. If, later, the claimant does in fact repay part of his or her borrowing, the notional and the actual repayments should, so far as is possible, be treated as relating to the same part of the borrowing.

ITA07/S407 (1) sets out the events counting as recovery of capital. These are where individuals:

  • sell or give away or is repaid any part of their ordinary share capital, or
  • are repaid any part of a loan or advance made by them to the close company, or
  • assigns any debt due to them from the close company (this would include the conversion of loan stock to ordinary share capital in the close company if the loan stock is assigned to the company in exchange for shares), or where the company repays to the individuals an amount of a loan or advance from those individuals.

If transactions are not at arm’s length, the consideration is taken to be equal to the market value.