Benefit in kind rules for loans

An interest-free loan to an employee (or director) is chargeable to tax if it exceeds £10,000 at any time during the tax year. The amount chargeable is the rate of interest set as the ‘official rate’. Since 6 April 2023, this has been 2.25% and is charged on the average amount outstanding during the fiscal year.

Any amount written off is chargeable as a payment of emoluments.

The de minimis exemption of £10,000 (above) does not apply to a loan to a participator in a close company. If such a person has a loan or advance nine months after the end of the accounting period in which the advance or loan was made, a charge will arise under section 455 Corporation Tax Act 2010 (CTA 2010) which is 33.75% (32.5% up to 5 April 2022) of the amount outstanding.

The benefit in kind charge will not be made if:

• the loan or advance does not exceed £10,000, and
• the borrower works full time for the company or one of its associated companies.

For the purposes of establishing whether a taxable benefit arises, it is necessary to aggregate all loans and advances. As well as straightforward loans, the following are also regarded as loans:

• overdrawn director’s loan account; and
• advances on account of expenses payments; although in practice HMRC disregard advances not exceeding £1,000 provided that the amounts are spent within six months and the employee accounts to the employer at regular intervals for the expenses (ITEPA 2003, sections 174–190).

Example

A civil servant was required by his employers to move to London from Wigan. He received an advance of salary which was interest-free and repayable on demand in certain circumstances. It was repaid by monthly instalments over ten years and he was assessed on it. He appealed, contending that he received no benefit from it. This was rejected by the court, holding that the true nature of the advance was a loan from the employer. Williams v Todd [Ch D 1988, 60TC 727]. Further details on advances of expenses can be found at EIM26155.

There are two methods of calculating beneficial loan interest:

• average basis (based on the opening and closing balances of the loan) and
• alternative method – calculated on the day-to-day outstanding balance of the loan.

The averaging method automatically applies unless the employee elects for the alternative precise method, or the inspector gives notice that he or she intends to use the precise method. An example of the calculation using the average method can be found at EIM26311.

If interest is charged on loans over £10k and no benefit in kind arises, the amounts are still reported on P11D.

Our article on how to avoid common errors and omissions when submitting P11Ds is worth looking at before making any submissions.

ACCA’s full guide to benefits and forms P11D is available from our website.