SolvedCFM35820 | Loan relationships: connected parties: late interest: examples
From HM Revenue & Customs · Corporate Finance Manual
Late paid interest: examples
Example 1
TF Ltd, a close company, borrows from Sarah Bright, a director and majority shareholder.
Interest of £2,000 accrues in the year to 31 March 2019, but is not paid until 5 November 2020.
Sarah is an individual and so is not within the loan relationship rules. She will not be taxed until the interest is received, in 2020/21.
TF Ltd has an entry in its accounts to 31 March 2019 for the interest debit. Without CTA09/PT5/CH8, there is nearly a 2-year gap between TF Ltd getting relief, and Sarah Bright being taxed on the receipt of that same interest.
Applying CTA09/S375, TF Ltd does not get relief until it pays the interest; in the accounting period to 31 March 2021.
Example 2 - rolled up interest
JK Ltd borrows £100,000 from Ibes NV, its parent in the Netherlands Antilles, for a 5-year term. It does this for an accounting period ended 31st October 2010. The loan was refinanced in October 2014, before the FA15 changes had effect.
Compound interest of 6% per annum is payable, but the agreement allows it to be rolled up and paid as a lump sum at the end of Year 5.
At this point in time, JK Ltd and Ibes NV are connected under the old rules (CTA09/S374).
Ibes NV is not within the loan relationships legislation.
JK Ltd’s accounts will show the interest accruing each year under the amortised cost basis.
| Year | Interest accrued | Interest allowed as a debit |
|---|---|---|
| 1 | £6,000 | None - still unpaid at the end of Year 2 |
| 2 | £6,360 | None - still unpaid at the end of year 3 |
| 3 | £6,742 | None - still unpaid at the end of Year 4 |
| 4 | £7,146 | £7,146 - paid by the end of Year 5 |
| 5 | £7,575 | £26,677 - (£7,575 for the year, and £19,102 paid relating to earlier years) |
Changes made by FA15
FA15/S25 limited the cases of connection to which the late interest rules apply. In particular, it removed the cases where there is connection through control or connection through a major interest. Please see CFM35985 for information.