Tax relief on interest

[Tim]

I have a friend who perhaps foolishly lent money to a Ltd company. He
borrowed this money from his father. Unfortunately this company went
bankrupt together with this money.

The Ltd was a closed company and my friend should get tax relief on the
interest element of this borrowing except that now he has no income and
cannot pay.

If interest payments are deferred for a year or two can he obtain tax relief
on this "back interest"? What must his relative say in his tax return?

Many thanks.

 

[John Pointon]

I have a friend who perhaps foolishly lent money to a Ltd company. He
borrowed this money from his father. Unfortunately this company went
bankrupt together with this money.

The Ltd was a closed company and my friend should get tax relief on the
interest element of this borrowing except that now he has no income and
cannot pay.

If interest payments are deferred for a year or two can he obtain tax relief
on this "back interest"? What must his relative say in his tax return?

Many thanks.

Having received no interest, the father has nothing to declare on his
tax return until he actually does so.

Was the loan from the father documented and was it made explicit that
the funds were being llent on to the close company?

If so, so long as the law does not change in the interim, relief will
be due as and when interest is paid to the father.



`John Pointon
Accountant, Tax Consultant
"In business to grow your business"

 

[Tim]

Having received no interest, the father has nothing to declare on his
tax return until he actually does so.

Was the loan from the father documented and was it made explicit that
the funds were being llent on to the close company?

If so, so long as the law does not change in the interim, relief will
be due as and when interest is paid to the father.



`John Pointon
Accountant, Tax Consultant
"In business to grow your business"

Many thanks. I understand his father sent a cheque payable to the company
and was cashed straight into the company's account. I assume the
documentation such as bank details will be stored with the liquidators.

 

[Ronald Raygun]

Many thanks. I understand his father sent a cheque payable to the company
and was cashed straight into the company's account. I assume the
documentation such as bank details will be stored with the liquidators.

That merely proves that the money chaged hands, not that it was a loan.

 

[Tim]

That merely proves that the money chaged hands, not that it was a loan.

So what sort of proof is needed?

My understanding is that all the directors, of which my friend was one,
loaned the same amount. I assume there must be some documentation or
verification.

 

[John Pointon]

So what sort of proof is needed?

My understanding is that all the directors, of which my friend was one,
loaned the same amount. I assume there must be some documentation or
verification.

A letter from the lender to the company setting out the terms of the
loan as to principal, repayment and interest would be appropriate -
ailing that, a statement from the directors confirming the terms upon
which the monies were received by the company. Presumably, the monies
were entered into the company's books as loans. How were they shown in
the annual balance sheets?





John Pointon
Accountant, Tax Consultant
"In business to grow your business"

 

[Tim]

A letter from the lender to the company setting out the terms of the
loan as to principal, repayment and interest would be appropriate -
ailing that, a statement from the directors confirming the terms upon
which the monies were received by the company. Presumably, the monies
were entered into the company's books as loans. How were they shown in
the annual balance sheets?

My understanding was that my friend received a loan from his father and he
loaned the money to this company. For expediency the money went straight
from father to company. The closing balance sheet by the liquidators shows
my friend to be a creditor.

I doubt there was any paper work between friend and father. I suppose some
can be rustled up retrospectively!

 

[John Pointon]

My understanding was that my friend received a loan from his father and he
loaned the money to this company. For expediency the money went straight
from father to company. The closing balance sheet by the liquidators shows
my friend to be a creditor.

I doubt there was any paper work between friend and father. I suppose some
can be rustled up retrospectively!

Clearly the liquidator was satisfied as to the source of the loan, Keep
the closing statement of affairs and produce it to the Revenue should
they ever raise the point.
Never rustle up evidence retrospectively - you could go to jail and will
certainly not receive £200!





John Pointon
Accountant, Tax Consultant
"In business to grow your business"

 

[Ronald Raygun]

Never rustle up evidence retrospectively - you could go to jail and will
certainly not receive £200!

It's unlikely to be considered naughty to rustle up evidence
retrospectively, provided all that is being done is to document
after the fact what the intentions of all concerned were at the
relevant time. Only if facts are falsified will they get into
trouble.

What has happened here is that the father lent the son money which
the son then lent to his company. Any repayments are clearly not
taxable, and any interest paid by the company to the son will be
taxed as the son's income only to the extent that it exceeds any
interest the son pays to the father. In the case that the son
charges the company the same rate as the father charges him, there
is no charge to the son at all, but the father will be taxed on
interest he receives, if any.

 

[Tim]

It's unlikely to be considered naughty to rustle up evidence
retrospectively, provided all that is being done is to document
after the fact what the intentions of all concerned were at the
relevant time. Only if facts are falsified will they get into
trouble.

What has happened here is that the father lent the son money which
the son then lent to his company. Any repayments are clearly not
taxable, and any interest paid by the company to the son will be
taxed as the son's income only to the extent that it exceeds any
interest the son pays to the father. In the case that the son
charges the company the same rate as the father charges him, there
is no charge to the son at all, but the father will be taxed on
interest he receives, if any.

Indeed that was the ideal solution but the company became insolvent and the
loan went with it. Hence the question about deferring interest payments
because he can't afford to pay the interest at the moment. I assume these
payments remain tax deductible and his father will pay tax on the interest
he receives.

 

[John Pointon]

Indeed that was the ideal solution but the company became insolvent and the
loan went with it. Hence the question about deferring interest payments
because he can't afford to pay the interest at the moment. I assume these
payments remain tax deductible and his father will pay tax on the interest
he receives.

Your assumption is correct provided the law on the taxability of
interest received and the deductibility of interest paid remains as it
is currently .




John Pointon
Accountant, Tax Consultant
"In business to grow your business"

 

[Ronald Raygun]

Indeed that was the ideal solution but the company became insolvent and
the
loan went with it. Hence the question about deferring interest payments
because he can't afford to pay the interest at the moment. I assume these
payments remain tax deductible

I would have thought so, on the basis that the original loan had
a business purpose. Help sheet IR340 seems to concur, and IR150
page 23 directs you to claim the appropriate amount in box 15.1.

and his father will pay tax on the interest he receives.

Quite.