Planning on Borrowing?
Posted on 11th January 2017 at 13:01
Some trading partnerships require significant borrowings in the short to medium term. But the question is will partners receive income tax relief for interest paid on the borrowings?
Throughout many cases the event of tax relief will occur, but there potentially can be downfalls that you may wish to avoid.
Firstly, if the money is to be borrowed personally by the partners and then later injected into the partnership as capital or by way of loan, then tax relief will be claimed on personal Self-Assessment returns. Tax relief could possibly be claimed earlier if the borrowing is done by an individual partner, but also depending on the partnership's accounting reference date. Although if the partnerships repaid some of the partner's loan or capital, its proven they have paid an amount of their borrowings and tax relief on interest will be limited.
When a loan is taken out by a partnership the interest paid on it will qualify for tax relief as an expense in the accounts if its solely for the purpose of the business. Although to be clear, interest on capital paid to a partner isn't an allowable deduction. Instead this is an allocation of profit regardless how its treated within the accounts.
Lastly, restrictions may need to be thought about including having an understanding of the rule stating that tax relief will be denied if the sole purpose of a transaction is the gaining of such relief.
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