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HMRC internal manual

Savings and Investment Manual

Relief for interest paid: interest in an employee controlled company

Loan to buy interest in employee-controlled company

ITA07/S396 and ITA07/S397 provide relief for interest paid on a loan obtained by individuals and applied by them in acquiring any part of the ordinary share capital of an employee controlled company. The shares must be acquired by the individuals either before the company became employee-controlled, or no later than 12 months after it became employee controlled.

An ‘employee-controlled company’ is one where more than 50% of the issued ordinary share capital of the company and more than 50% the voting power in the company are beneficially owned by individuals who are full-time employees of the company. Where an individual owns more than 10% of the issued ordinary share capital or voting power, the excess over 10% is ignored for the purpose of determining if the company is employee-controlled.

A full-time employee is one who works for the greater part of his or her time as a director or employee of the company or of a 51% subsidiary.

Repayment of another loan

Interest relief is also due where an individual repays another loan that is eligible for interest relief under this section. ITA07/408 provides that the original loan and the replacement loan are treated as one loan.

Eligibility requirements

Interest is only eligible for relief if conditions A to D are met.

Condition A is that from the date the loan is applied to the date the interest is paid the company must be an unquoted company resident only in the United Kingdom, and a trading company or holding company of a trading group. ‘Unquoted company’ here means a company none of whose shares are in the official UK list (see ITA07/S1005 (5)); ‘trading company’ means a company whose business consists wholly or mainly of carrying on a trade; ‘holding company’ means a company which holds the shares of companies which are its 75% subsidiaries.

FA14 extends the relief for investment in employee-controlled companies to include investment in companies resident in an EEA state other than the UK. This applies to payments made on or after 6 April 2014.

Condition B is that in the tax year in which the interest is paid the company either first becomes an employee-controlled company or is so throughout a period of 9 months.

Condition C it that the individual must be a full-time employee of the company, from the date when the proceeds of the loan are applied to the date when the interest is paid. Where the individual has ceased to be a full-time employee at the date the interest is paid, relief will continue on interest paid within 12 months of the date of cessation, provided that he or she worked as a full-time employee from the date the loan applied to the date of cessation.

Condition D is that in the period from the use of the loan to the repayment of the interest, the individual has not recovered any capital from the company, other than capital that is used to repay the loan. Where there is a recovery of any capital from the company, relief for interest paid is restricted in the way described in SAIM10250.