Muras Matters: Official Rate of Interest

Official Rate of Interest

HM Revenue & Customs have confirmed that their ‘official rate of interest’ has been revised down to 3% from 6 April 2015 for the 2015/16 tax year. It is subject to review however should there be significant interest rate changes. Previously the official rate was 3.25% for the 2014/15 tax year.

Background

The ‘official rate of interest’ is used to calculate the benefit in kind arising on low interest or interest free loans provided to an employee (or their relative) by an employer, in excess of £10,000 (prior to 6 April 2014, it applied to loans in excess of £5,000).

The benefit arising is the notional interest which would arise on the loan calculated at the official rate of interest, less any actual interest paid.

Tax Planning Opportunities

Employers may wish to consider providing cheap or interest free loans as a tax efficient incentive to employees, perhaps to enable them to buy a car for example. A loan of up to £10,000 will not attract a benefit in kind at all and may prove to be an attractive incentive, perhaps in lieu of a pay rise.

Obviously there will be a cost to the company of providing loans but, if the company has surplus cash, the cost may be relatively small with reference to the interest being earned on a business account.

It is important to note that any loans provided in excess of £10,000 will be subject to a notional interest charge on the whole amount of the loan. In addition where loans are provided by a company to its ‘participators’ (broadly shareholders or loan creditors), or their associates, a tax charge may arise on the company. In general terms the charge arising will be 25% of any amount outstanding 9 months after the end of the company’s accounting period. The tax is recoverable by the company after the loan is repaid or written off.

A further tax planning opportunity arises where director shareholders have money invested in their business. Very often such money is lent interest free but by charging interest at a commercial rate funds can be extracted in a tax efficient manner. This is because national insurance is not charged on interest (in contrast to salary) and tax relief would be available to the company (in contrast to dividends). In addition, from 6 April 2015, in certain limited circumstances a low earning director may receive interest free of income tax altogether.

Although any income is likely to be modest, interest paid to a director at the official rate or even slightly higher (on the basis this is accepted as being commercial) is likely to be a better return on surplus funds than could easily be found for personal bank accounts on the high street.

If you would like any further information regarding any of the above opportunities, please contact our Tax Director Jenny Marks.

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