Loan interest

[CryptoPlankton]

I am struggling to find out how the interest from a loan will be treated for income tax purposes. I have established that interest from peer to peer lending is covered by the personal savings allowance (and so also, presumably, by the up to £5k starting rate for savings?). But P2P seems to have a specific definition and what isn't clear is how other loan interest is treated. I need to know whether interest received on a loan to a small limited company (with which the lender has no official position) will be treated similarly or simply as income.

Does anybody know please?

TIA, CP

[PinkDalek]

I need to know whether interest received on a loan to a small limited company (with which the lender has no official position) will be treated similarly or simply as income.

This reply is somewhat jumbled but I'll leave as is.

I can't think of any reason it should not be treated as savings income as it is interest.

Page TR 3 here https://assets.publishing.service.gov.u ... 0_2019.pdf includes (my bold)

Interest and dividends from UK banks and building societies

This includes:

• any interest you receive on bank, building society and other savings accounts

We include untaxed interest from a unit trust in box 2 there but I've never been certain that is the correct treatment.

It might not fall under that heading and may be reportable on the last few boxes of page TR 3 here https://assets.publishing.service.gov.u ... 0_2019.pdf (where one would make clear it is interest).

Although the notes on Page TRG 5https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/787630/SA150_2019.pdf possibly direct one to the Additional Information pages https://assets.publishing.service.gov.u ... 1_2019.pdf but I can't see where reportable there.

As for the starting rate for savings etc, I've failed to find anywhere that suggests the interest doesn't fall under that heading/treatment. How this actually works I'm not sure. If it were included in Bank etc Interest it would follow the normal course. What I don't know is what happens when it is reported elsewhere on the tax return. Does the individual do online returns? If so, that might be a way of seeing how it is treated. If paper returns, I know they sometimes make mistakes on capturing some info I provide (foreign tax credit relief), so I'm unsure one can rely on that route.

Depending on the amounts involved, I might be tempted to report as if bank interest etc and make any appropriate disclosure in the Any other information white space box on the SA 100 itself. Alternatively, invest some time in attempting to speak to HMRC.

No help really, sorry. Hopefully someone will come along who knows the answer!

Edit: I had loads of tabs open when writing the above and was distracted a couple of times. One was this one https://assets.publishing.service.gov.u ... 1-6011.pdf [the old draft explanatory clause]. It includes (which may assist me as against you but I'll put it here anyway):

15. Savings income is defined at section 18 of ITA and includes a number of different types of  payments, such as interest; certain purchased life annuity payments; profits from deeply  discounted securities; gains from certain contracts for life insurance and certain accrued  income profits.  

[CryptoPlankton]

Depending on the amounts involved, I might be tempted to report as if bank interest etc and make any appropriate disclosure in the Any other information white space box on the SA 100 itself. Alternatively, invest some time in attempting to speak to HMRC.

Thanks for taking the time to reply, PD. The interest exceeds the personal savings allowance but, when combined with other savings interest, the total should fall within the starting rate for savings. It isn't essential to know, but would be very helpful in deciding how much taxable income to take from another source (personal pension) over the next three or four years.

I have invested some time in attempting to speak to HMRC, but the very polite automated lady at the other end of the line keeps saying they are too busy, apparently even to let me wait on hold! I shall persevere...

Thanks again.

[genou]

I need to know whether interest received on a loan to a small limited company (with which the lender has no official position) will be treated similarly or simply as income.
TIA, CP

I'm with PD here. There is no "simply as income" . It has to have a character - income from employment, dividends etc. If it is interest, then it is interest for the purpose of savings allowance / starting rate . Unless they have changed things, interest is not tax legislation defined - it just follows the legal character of the payment. If there is a loan agreement that says interest will be paid then it will be treated as interest ( short of some form of avoidance scheme, which you say is not the case ) .

[Gersemi]

I think the answer can be found in the Savings and Investment Manual at SAIM1080 https://www.gov.uk/hmrc-internal-manual ... l/saim1080 - savings income includes interest as defined at SAIM2000 - 2030 states

“Interest is the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another. Interest accrues from day to day even if payable only at intervals, and is, therefore, apportionable in respect of time between persons entitled in succession to the principal.” - so the interest on loan described qualifies.

SIAM1080 states that the starting rate for savings applies to savings income. So the interest on the loan will qualify for the 10% rate.

[Lootman]

“Interest is the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another. Interest accrues from day to day even if payable only at intervals, and is, therefore, apportionable in respect of time between persons entitled in succession to the principal.” - so the interest on loan described qualifies.

As usual, written in a way that makes it hard to understand what they are actually saying. Why write in plain English when you can instead be obfuscatory?

But if I am reading it correctly, then income tax might be due on interest that is not actually paid out. It is sufficient for tax purposes that it merely accrues.

Rents get treated that way but I always thought that interest was taxable only upon actual receipt. At least that is how my bank handles it in the tax certificate they send me every year.

[CryptoPlankton]

I'm with PD here. There is no "simply as income" . It has to have a character - income from employment, dividends etc. If it is interest, then it is interest for the purpose of savings allowance / starting rate . Unless they have changed things, interest is not tax legislation defined - it just follows the legal character of the payment. If there is a loan agreement that says interest will be paid then it will be treated as interest ( short of some form of avoidance scheme, which you say is not the case ) .

Many thanks genou and Gersemi. I think that gives us enough confidence to plan this tax year by treating it as such. I will take PD's advice and use "Any other information" to ensure transparency - then hopefully the worst that can happen, if there were to be any issues, is that there will be some tax to pay.

Thanks all.

P.S. There is a loan agreement, registered with a charge at Companies House.