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From 9 October 2007 where an individual pays interest on a loan to invest
in a partnership or certain kinds of small company, the loan interest will
be restricted in certain cases.
Certain loans are structured such that all the interest on the loan is
payable at the beginning. This leads to a large tax deduction because the
existing rules allow for a tax deduction in the year that the interest is
paid and not the year to which it relates. The resulting loss can be set
against other income and capital gains and lead to potentially large
repayments.
The borrower may then repay the loan at a large discount to reflect its non
interest bearing nature.
The new rules deny tax relief on the interest which is due for later years.
Our view
This is a further example of HM Revenue & Customs using the tax scheme
disclosure rules to close down perceived tax avoidance loopholes. |
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