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:-
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 payday loan 400 dollars 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?
There are a number of restrictions which can limit the amount of interest that can be claimed:-
These restrictions apply to loan interest outside a business structure, but it is also worth noting that interest paid within the business accounts can also potentially be restricted. If the business has an overdrawn balance sheet, then HMRC could argue that part of the business borrowings are financing drawings which would result in a restriction on the allowable interest within the financial statements.
Also don’t forget that if your business uses the cash basis, loan interest relief is restricted to a maximum of ?500 a year.
Whilst commenting on loan interest relief, it would be appropriate to mention one common piece of tax advice for partners which can convert non-qualifying borrowings into qualifying borrowings.
This article is intended merely as an overview of the issue of income tax relief on loan interest and possible restrictions involved. For detailed guidance of how this may apply in your own personal circumstances, please contact us for further information.