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Chargeable benefits from cheap loans

Source: HM Revenue & Customs | | 07/05/2019

An employee can obtain a benefit when provided with an employment-related cheap or interest-free loan. The benefit is the difference between the interest the employee pays, if any, and the commercial rate the employee would have to pay on a loan obtained elsewhere. These types of loans are referred to as beneficial loans.

A taxable cheap loan is an employment-related loan:

  • which is outstanding for all or part of the year in which the employee is in employment, and
  • no interest is paid on the loan, or the interest paid is less than is due at the official rate of interest, and
  • none of the exceptions listed in sections 176-179 ITEPA apply.

The official rate of interest on beneficial loan arrangements is currently 2.5%. A change in the rate is only made in the event of significant changes in interest rates. An employee can also benefit if an employment-related loan is released or written off. He or she is then no longer obliged to repay the amount that was lent.

A benefit in kind will be applicable where a loan is provided at an interest rate of less than 2.5%. In addition, employers must also pay Class 1A National Insurance. It is not necessary for the loan to be advantageous to the recipient for a chargeable benefit to arise.

 

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McAllisters is a partnership trading from Paxton House, 11 Woodside Crescent, Glasgow providing accountancy and tax services and general business advice and is a member of ICAS (Registration No 0342) and an FCA exempt professional firm (No 301235). Its VAT number is 261 3019 94

McAllisters (Scotland) Ltd is a related business providing tax and business advisory services to McAllisters and its clients. McAllisters (Scotland) Ltd is registered in Scotland (Registration number SC146856). Its VAT number is 624 0564 62.

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