Generally, tax relief is available, but the rules are different if you’re a small business using the cash basis…

Tax relief on business-related loans

Subject to certain conditions and restrictions, tax relief will generally be available for interest paid on loans to, or overdrafts of, a business in the form of a deductible expense. Different rules for loan interest relief apply to smaller businesses using HMRC’s cash basis for income tax purposes (see below).

One of the main qualifying conditions for the deduction is that the interest must be paid wholly and exclusively for the purposes of the business and at a reasonable rate of interest. Tax relief is only available on interest payments – the repayment of the capital element of a loan is never tax-deductible.

Where only part of a loan satisfies the conditions for interest relief, only a proportion of the interest will be eligible, for example, interest payable in respect of, say, a car used partly for business and partly for private purposes will be apportioned accordingly. Note, however, that tax relief is not available for an employee using a privately-owned car for the purposes of his or her employment, although tax-free business mileage payments may usually be claimed.

A deduction cannot be claimed for notional interest that might have been obtained if money had been invested rather than spent on (for example) repairs.

In addition, a deduction will not be allowed if a loan effectively funds a business owner’s overdrawn current/capital account.

Anti-avoidance rules exist to prevent tax relief on loan interest paid where the sole or main benefit to the payer from the transaction is to obtain a tax advantage.

Incidental costs

In addition to loan interest relief, the incidental costs of obtaining loan finance, such as fees, commissions, advertising and printing, will also be deductible in most cases. The deduction for incidental costs is given at the same time as any other deduction in computing profits for income tax purposes.

Cash basis

From 2013/14 onwards, eligible unincorporated small businesses may choose to use the cash basis when calculating taxable income, and all unincorporated businesses have the option to use certain flat-rate expenses when calculating taxable income.

The general rule for businesses that have chosen to use the cash basis is that no deduction is allowed for the interest paid on a loan. This is however, subject to a specific exception. Where the deduction for loan interest would be disallowed under this general rule or because (and only because) it is not an expense wholly and exclusively for the trade, a deduction is allowed of up to £500.

This £500 limit does not apply to payments of interest on purchases, provided the purchase itself is an allowable expense, as this is not cash borrowing. However, if the item purchased is used for both business and non-business purposes, only the proportion of interest related to the business usage is allowable.

If a deduction is also claimed for the incidental costs of obtaining finance, the maximum deduction for both these expenses together is £500.

If a business has interest and finance costs of less than £500 then the split between business costs and any personal interest charges does not have to be calculated.

Businesses should review annual business interest costs – if it is anticipated that these costs will be more than £500, it may be more appropriate for the business to opt out of the cash basis and obtain tax relief for all the business-related financing costs.

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It can pay off to keep track of your business mileage you incur for your rental properties – here’s why.

Using your car in your property rental business

Landlords will often use their car for the purposes of their property rental business. Where they do so, they are able to claim a deduction for the costs that they incur.

Using mileage rates

Where a landlord uses their car for business purposes, the easiest way to work out the amount that can be deducted is to make use of the simplified expenses system and use the relevant mileage rates to claim a deduction based on the business mileage undertaken.

For cars (and also vans) the rate is set at 45p per mile for the first 10,000 business miles in the tax year and at 25p per mile for any subsequent business mileage.

Example

Karen is an unincorporated landlord and has three properties that she lets out. During the tax year, she undertakes 712 business miles in her own car in respect of her property business.

She claims a deduction of 45p per mile, a total deduction for the year of £320.40.

Deduction based on actual costs

The use of simplified expenses, while generally easier from an administration perspective, is not compulsory. The landlord can instead claim a deduction based on the actual costs. However, in practice this will be time consuming. Further, where the car is used for both business and private travel, a deduction is only permitted for the business element. Separating actual costs between business and private travel can be very time consuming and will only be worthwhile where it gives rise to a significantly higher deduction than that obtained by using the mileage rates.

Capital allowances

Capital allowances cannot be claimed where mileage allowances are claimed. Where a deduction is based on actual costs, capital allowances can be claimed in respect of the car. However, the claim must be adjusted to reflect any private use. So, for example, if a car is used for the purposes of the property business 20% of the time and for private use 80% of the claim, any capital allowance claim must be restricted to 20%.

Other travel

The costs of travel on public transport or by taxi can be deducted in computing the profits of the property rental business to the extent that it constitutes business travel for the purposes of that business.

Partner note: ITTOIA 2005, s. 94D

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