In small family businesses, whether trading as partnerships or companies, it is worthwhile reviewing interest paid to the lender. Often loans are made by parents, brothers or sisters, or children who aren’t partners to benefit the trading entity. Some of which will not be taxpayers, or if they are may have low or part time incomes.
Where a commercial rate of interest is paid this can be tax efficient. With Banks charging between 2.5% and say 7% above bank base rate, it is easy to argue that 10%-12% for unsecured lending is reasonable.
In addition to using personal allowances of £12,570, where the individual’s total income is less than £18,570 the interest is tax-free in the hands of that individual.
This is due to a starting rate for savings band of £5,000. In addition to this, a further Personal Savings Allowance of £1,000 is tax free for all individuals whose income is less than £50,270 which drops to £500 if income exceeds £50,270.
Where a partnership pays interest then it can be paid gross of tax. Also where a company pays an individual interest tax at 20% has to be deducted and paid over to the Revenue using a Return form (CT61Z). The tax deducted on interest can be reclaimed by the individual in those circumstances.
Care is needed to keep the above as simple as possible with the minimum amount of paperwork, but can be highly tax efficient.
