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Debit and Credit Interest

Practical Issues
billyfreezer
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Debit and Credit Interest

#327462

Postby billyfreezer » July 20th, 2020, 11:14 am

I'm confused how debit interest is handled. For tax purposes, I would've thought you could simply offset debit interest and credit interest, and whatever the resultant amount is taxed normally as interest earned (above the allowance).

Example. If I have bank savings earning £2,000 a year interest.
I also have a loan which I am paying £1,000 a year interest.
Net interest earned would be £1,000, hence the threshold for allowance and I end up paying no taxes. That's what I thought happens.

With the loan, I buy shares. I've been told I don't use the debit interest against credit interest, but use it as a cost of acquisition of shares. Is this correct? Makes things really complicated over several years - e.g. if the debit interest accumulates over several years and I do not dispose of the acquired shares - or assigning which shares were acquired with loan money and which were not....

Do things change if the 'loan' was actually shares bought via margin?
Thanks

dealtn
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Re: Debit and Credit Interest

#327464

Postby dealtn » July 20th, 2020, 11:19 am

billyfreezer wrote:I'm confused how debit interest is handled. For tax purposes, I would've thought you could simply offset debit interest and credit interest, and whatever the resultant amount is taxed normally as interest earned (above the allowance).

Example. If I have bank savings earning £2,000 a year interest.
I also have a loan which I am paying £1,000 a year interest.
Net interest earned would be £1,000, hence the threshold for allowance and I end up paying no taxes. That's what I thought happens.

With the loan, I buy shares. I've been told I don't use the debit interest against credit interest, but use it as a cost of acquisition of shares. Is this correct? Makes things really complicated over several years - e.g. if the debit interest accumulates over several years and I do not dispose of the acquired shares - or assigning which shares were acquired with loan money and which were not....

Do things change if the 'loan' was actually shares bought via margin?
Thanks


Is your "buy shares" considered by HMRC to be a business, as opposed to personal investment? Qualifying loans have the capacity for the interest cost to be used as a relief, but that isn't generally the case, and even if that were the case they don't specifically "work" in the way you describe as "netting" against credit interest.

I suspect your "I would've thought" is simply wrong I'm afraid.

Alaric
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Re: Debit and Credit Interest

#327468

Postby Alaric » July 20th, 2020, 11:33 am

billyfreezer wrote: For tax purposes, I would've thought you could simply offset debit interest and credit interest, and whatever the resultant amount is taxed normally as interest earned (above the allowance).


For UK individual tax payers, a general ability to gain a tax relief on interest paid on loans had been disappearing for years. One of the more recent removals was being able to offset interest on buy to let loans against rental income. Before that was the abolition of MIRAS (Mortgage Interest Relieved At Source)

Once upon a time I believe it was possible to borrow to buy shares and offset the interest on the loan against tax. I don't think that got past the 1970s.

The easy way to offset tax on interest against loans is to use the cash to pay off the loan.

PinkDalek
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Re: Debit and Credit Interest

#327477

Postby PinkDalek » July 20th, 2020, 12:02 pm

Alaric wrote:[One of the more recent removals was being able to offset interest on buy to let loans against rental income.


I may have missed something, somewhere, but isn't basic rate relief still available as originally envisaged?:

Policy paper
Restricting finance cost relief for individual landlords
Updated 6 February 2017

https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords

... from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction ...

Edit: Then see Proposed revisions as to how relief was to be obtained.

PinkDalek
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Re: Debit and Credit Interest

#327479

Postby PinkDalek » July 20th, 2020, 12:12 pm

billyfreezer wrote:[With the loan, I buy shares. I've been told I don't use the debit interest against credit interest, but use it as a cost of acquisition of shares. Is this correct? ...


Told by whom?

I don't know the answer but I very much doubt it is correct.

The interest doesn't fall within:

Expenditure: incidental costs of acquisition and disposal
TCGA92/S38 defines the incidental costs of acquisition and disposal. The definition is exhaustive. ...

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg15250

Whether or not you can obtain relief in some other way is beyond my pay scale.

Another edit: https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim10000 will tell you more.

bluedonkey
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Re: Debit and Credit Interest

#327489

Postby bluedonkey » July 20th, 2020, 12:58 pm

It's usually a mistake to expect the tax rules to follow what's reasonable or common sense or fair. It's usually more complicated. In fact, if it seems reasonable, it's probably incorrect!

johnhemming
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Re: Debit and Credit Interest

#327509

Postby johnhemming » July 20th, 2020, 2:54 pm

PinkDalek wrote:I may have missed something, somewhere, but isn't basic rate relief still available as originally envisaged?:

As far as I know it is, but it gets complicated because people can end up in the higher tax rates because of the income.

bluedonkey
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Re: Debit and Credit Interest

#327531

Postby bluedonkey » July 20th, 2020, 3:37 pm

johnhemming wrote:
PinkDalek wrote:I may have missed something, somewhere, but isn't basic rate relief still available as originally envisaged?:

As far as I know it is, but it gets complicated because people can end up in the higher tax rates because of the income.

Yes, the interest on the loan is disallowed as an expense, therefore increasing taxable income. The basic rate tax relief is then given as a deduction from the tax bill: interest x 20%.

PinkDalek
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Re: Debit and Credit Interest

#327546

Postby PinkDalek » July 20th, 2020, 4:46 pm

bluedonkey wrote:
johnhemming wrote:
PinkDalek wrote:I may have missed something, somewhere, but isn't basic rate relief still available as originally envisaged?:

As far as I know it is, but it gets complicated because people can end up in the higher tax rates because of the income.

Yes, the interest on the loan is disallowed as an expense, therefore increasing taxable income. The basic rate tax relief is then given as a deduction from the tax bill: interest x 20%.


Yup but John H omitted to take note of my later link (in the same quoted post) to:

https://www.gov.uk/government/publicati ... -landlords

It is all there under the aforementioned Proposed revisions.

bluedonkey
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Re: Debit and Credit Interest

#327549

Postby bluedonkey » July 20th, 2020, 5:04 pm

PD - yes, you're right. I was just trying to translate it a bit. I seem to spend a lot of my time translating HMRC docs.
BD

billyfreezer
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Re: Debit and Credit Interest

#327577

Postby billyfreezer » July 20th, 2020, 7:17 pm

Okay wow. Gets pretty complicated, thanks for the help. Not easy!

So in my brokerage account I have:
positive cash balance in GBP, earning me interest in GBP
negative cash balance in USD, costing me interest in USD.

The overall net interest is a cost to me.

But I will have to pay income tax on the interest earned in GBP, and the interest cost in USD...I can't offset against anything?

The buggers!

Alaric
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Re: Debit and Credit Interest

#327594

Postby Alaric » July 20th, 2020, 9:12 pm

billyfreezer wrote:
But I will have to pay income tax on the interest earned in GBP, and the interest cost in USD...I can't offset against anything?


It's a tax that can be avoided by transferring sufficient from GBP to USD to pay off the negative balance.


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