RaulSam

There are various ways in which you can get income tax relief on loan interest

However, there are conditions which have to be met and also possible restrictions in the amount of relief that you can obtain.

Essentially, the loan has to be secured for a “qualifying purpose” as a starting condition. Broadly, the most common qualifying purposes to get tax relief on loan interest include:-

Buying shares in, or making a loan to, a close company;

Injecting money into a trading partnership (as a partner in that partnership);

Buying a property to let out.

In the case of the first two scenarios, the allowable interest is given as a deduction against total income. In the 3 rd case, the allowable interest is currently given as a deduction against the rental income (although see below).

It’s also worth pointing out that in the second scenario, the allowable interest will not only give you income tax relief at your highest rate but will generally also count as a deduction for Class 4 NIC purposes.

For those of you old enough to remember, there is no longer any income tax relief on mortgage interest suffered to buy your own home.

Ok, so you’ve got a loan which qualifies for income tax relief, but how much relief will you get?

Restrictions on tax relief on loan interest.

There are a number of restrictions which can limit the amount of interest that can be claimed:-

The most obvious, if you’ve got a repayment loan or mortgage, you won’t get relief for the total payments you make, as these include a capital repayment element. Only the actual interest (as shown on an annual mortgage statement) will be allowed.

In the case of a loan to a close company, if your loan is partly repaid and dips below the amount you originally borrowed, a restriction will be applied to the interest you can claim. Similarly, if you inject money into a partnership but your capital/current account falls below the amount borrowed, a restriction will also be imposed. […]