Interest on Joint Loans

By | 8 December 2008

Full relief or half?

It is not uncommon for married couples (or civil partners) to take out a joint loan, where only one of them (say, the husband) applies the proceeds for a purpose that qualifies the loan interest for tax relief. What is the tax position if the interest on the joint loan is paid out of a joint bank account? Can the husband claim relief for all the interest paid in this example, or only half?

The good news is that in HMRC’s view if husband and wife take out a joint loan, but only one of them uses the loan in a manner that qualifies for tax relief, that spouse is entitled to full tax relief on the loan interest paid, even if the joint liability is settled out of a joint account. This point is confirmed in HMRC’s Savings and Investment Manual at paragraph 10030.  

For example, husband and wife take out a joint loan for £250,000. Husband uses that loan to purchase shares in a qualifying company. Loan interest in the tax year amounted to £25,000, which was paid from a joint bank account. HMRC accept that Husband would be able to claim tax relief on the full amount of interest paid of £25,000.

However, what if one spouse (say, the wife) had taken out the loan, but husband and wife had both used the proceeds to purchase shares in the qualifying company? HMRC would not allow loan interest relief on the husband’s share purchase in those circumstances. This is on the basis that the loan has not been used by the person to whom the loan is made. Some care is therefore needed when advising clients on taking out qualifying loans such as to acquire an interest in a close company or a partnership, to ensure that the loan interest qualifies for full tax relief.

Now you see It…

An interesting point arose in preparing this article, concerning HMRC’s guidance manuals. Their view regarding interest paid on joint loans was originally in the Relief Instructions Manual at paragraph 420. Unfortunately, RE420 no longer exists! It was removed on 3 September 2008. This initially caused me some alarm; had HMRC changed their view on interest relief in the above circumstances? Fortunately, upon further investigation the deleted material was found in the Savings and Investment Manual instead.    

This episode demonstrates the importance of checking HMRC’s manuals for updates on a regular basis. In addition, if relying on guidance in HMRC’s manuals, it would be good practice to print a copy of the manual extract, showing the date on which the guidance was accessed and printed.

The above article is taken from ‘Practice Update’, a bi-monthly Newsletter from Mark McLaughlin Associates Ltd. See the Newsletters section.