BIM45695 | Specific deductions - interest: General business accounts, mixed use accounts and offset accounts

This chapter applies for Income Tax purposes to the computation of trade profits and property income. References in the text to a ‘business’ should therefore be taken to include both trades and property businesses. The chapter does not apply for Corporation Tax purposes, where there are separate rules in the loan relationships legislation (see CFM11000).

S34 Income Tax (Trading and Other Income) Act 2005

General business accounts

Many businesses operate accounts with overdraft facilities where all banking transactions are put through a single account. Normally it is not practical to separate tranches of borrowings for different specific purposes, or to ascertain which tranche is paid back and which continues.

Where the account is being used solely for business purposes, then the interest is an allowable deduction in the accounts. There is guidance at BIM45700 to BIM45725 on how to assess the deductibility of interest in situations where an account is used to process business and personal transactions.

Offset accounts

Offset accounts are those accounts that combine functions that historically were carried out using separate bank accounts - such as loans, savings accounts and current accounts. Interest is computed on the net borrowing from the bank.

If the borrowing element of an offset account was not wholly and exclusively for business purposes then an interest apportionment would be appropriate.

Example

Using an offset account Blaze and Rod borrowed £100,000 for the purchase of their own home. They then borrowed a further £250,000 to buy caravans to hire out as part of their business. Both their salaries are paid into the account together with caravan rental income of £2,000 a month. They pay all of their private expenses from the account. A reasonable apportionment of the interest charge would have to be made between the identifiable private and business purposes.

It is likely that the balance of the offset account will fluctuate. There is guidance at EIM26260 and EIM26261 on the allocation of debt repayments in these sorts of circumstances.