Alan Pink considers some of the ‘wrinkles’ in the rules for loans taken out to invest in a business – and the alternatives that should be considered.
It makes obvious sense that an individual who borrows money to invest in a business should get relief against tax for the interest on that loan. Thirty years ago or more, the tax rules were just about as straightforward as that statement of basic principle; but not any longer.
What we’ll be looking at in this article is the situation where an owner-managed business needs to borrow money for the purpose of that business; and principally where one of the protagonists in the business takes out a loan personally to raise the necessary capital.
The basic rules
These are to be found in ITA 2007, s 383 et seq. Loan interest is eligible for relief against the individual’s total income if it’s for one of the following:
