Interest Relief For Joint Loans

By | 28 March 2009

Qualifying Purpose

It is relatively common for married couples (or civil partners) to borrow funds in joint names (assuming of course that they can still find a bank that is willing to lend them money!). Tax relief may be available for the loan interest paid if the loan is for a qualifying purpose (eg to buy an interest in a close company, or to invest in a partnership), and if certain conditions are satisfied.

However, what is the position if husband and wife take out a joint loan, but only one spouse uses the whole loan for a qualifying purpose?

HMRC’s view, perhaps rather generously, seems to be that the spouse using the loan for a qualifying purpose is entitled to full relief for the interest paid, even if the interest is paid out of a joint account. The example given in HMRC’s Savings and Investment Manual is as follows (SAIM 10040):


“Mr and Mrs A took out a loan in joint names for £100,000 that was invested by Mr A in purchasing shares in a qualifying company. The interest paid on this loan in the tax year 07/08 totalled £10,000 and was paid from a bank account held jointly in the names of Mr and Mrs A.”

“Mr A would be able to claim relief for the full amount of interest paid in 07/08 of £10,000.”

Not so generous

However, the available relief is rather less generous if one spouse takes out the loan, which is then used by both husband and wife to invest the proceeds for what would otherwise be a qualifying purpose. In those circumstances, HMRC’s view is that income tax relief would only be available to the spouse who took out the loan, and only in proportion to the amount of qualifying investment by the spouse who took out the loan (SAIM10030). The reason given for this restriction in relief is that:

“…the loan has to be used by the same individual to whom the loan was made. Under these circumstances, the amount invested by the spouse who did not receive the loan has not been used to make a qualifying investment by the spouse who received the loan. That amount has been used to enable someone else to make an investment.”    

The moral is to ensure that business loans are structured in the correct way to ensure that tax relief is maximised wherever possible. Whilst the reasons given by HMRC for the relief restriction seem logical, It is difficult (for me at least!) to understand why full relief is available to one of the spouses in the above example, despite half the loan arguably not being attributable to the ‘qualifying’ spouse, and presumably half of the loan interest being paid by the ‘non-qualifying’ spouse from their share of capital in the joint bank account. Still, if HMRC wish to be generous in giving full tax relief, it would be churlish to refuse!

The above article is reproduced from ‘Practice Update’ (March/April 2009), a tax Newsletter produced by Mark McLaughlin Associates Ltd. See the Newsletters section.