SAIM10260 | Relief for interest paid: interest in a close company: ‘capital recovery condition’: example

Recovery of capital: example

On 1 July 2006, Jane buys 10% of the ordinary share capital of Widgets Ltd, a close trading company, for £10,000. She meets the cost using a loan of £15,000 obtained a few days earlier, bearing interest at 10% per annum, payable half-yearly. She pays interest on the loan as follows:

31 December 2006: £750

30 June 2007: £750

31 December 2007 : £750

She was engaged for the greater part of her time in the management of Widgets Ltd in the period from 1 July 2006 to 31 December 2007.

If, on 1 July 2007, she sold one half of her shares for £6,000, relief could be claimed as follows:

2006- to 2007:

£750 x £10,000 / £15,000 = £500

2007-08

Relief for interest paid 30 June 2007 :

£750 x £10,000 / £15,000 = £500

Relief for interest paid 31 December 2007 :

(£750 x £10,000 / £15,000 = £500) - (£6,000 x 10% x 6/12 = £300) = £200

Total Relief due = £700

If there are no further transactions and Jane continues to be a shareholder who is engaged for the greater part of her time in the management of the company, relief may be claimed for 2008-09 on £400 (£4,000 at 10%).