ATXP6 UK
Syllabus A1. Income tax A1a. The comprehensive computation of taxable income and income tax liability

A1a. Qualifying loans

Syllabus A1a)

B5 The comprehensive computation of taxable income and the income tax liability

Trading income and property business income

Certain interest payments made on loans taken are deducted from trading income and property business income. 

These include taking out a loan for trading purposes and taking out a loan to purchase an investment property. 

The interest payments here will be deducted from their respective headings that they relate to.

  • Here, we will look at the interest payments which will reduce a taxpayer’s total income.

  • Interest paid on certain loans are deductible from a taxpayer’s total income is known as interest paid on qualifying loans.

The main types of eligible loans are:

  1. Loan to purchase plant and machinery which is necessarily acquired for the use in the employment of the taxpayer

    Illustration:

    Purchasing a computer to use for employment, if a loan was taken out to make this purchase, then the interest payable is deducted from total income.

  2. Loan to purchase plant and machinery for the use in the business of a partnership, in which the taxpayer is a partner.

    Illustration:

    A partner would have taken out a personal loan to purchase a computer for use in the partnership, here interest payable would be deducted from total income

  3. Loan to purchase an interest in a partnership.

    Illustration:

    Partner A puts in £20,000 into the partnership bank account to fund the business. 

    If he has borrowed this £20,000 from a bank at 7% p.a., then he can deduct the £1,400 payable from his total income.

  4. Loan to purchase ordinary shares in a close company

    This is allowable as long as the taxpayer owns at least 5% of the ordinary share capital or works for the greater part of his time in the management of the company.