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Section 416 ITEPA 2003

The cash equivalent of a beneficial loan is treated as a payment of interest. This means that it can be claimed as a relief.

However, there is a limit on the amount that is treated as paid for Section 401 ITEPA 2003 purposes. The limit is the amount charged to tax after applying the 拢30,000 threshold described in EIM13505.

Example

A settlement agreement made on 1 July 2003 consists of cash 拢25,000 and a beneficial loan that is interest-free. Assume that the cash equivalent of the loan in 2003/04 is 拢4,000 (EIM26101 onwards).

The total of 拢29,000 is wholly covered by the 拢30,000 threshold (leaving 拢1,000 carried forward, see EIM13505).

As the amount charged to tax is nil, none of the cash equivalent is treated as a payment of interest. So no claim for interest relief can be made for 2003/04.

For 2004/05, assume that the cash equivalent of the loan is 拢7,500. The amount charged to tax is 拢6,500 (拢7,500 cash equivalent less 拢1,000 balance of threshold brought forward). So the amount treated as a payment of interest is limited to 拢6,500.

For 2005/06, assume that the cash equivalent of the loan is 拢5,750. The total chargeable under Section 401 ITEPA 2003 is 拢5,750. There is no balance of threshold brought forward, so the whole 拢5,750 is treated as a payment of interest and available for relief.

When the figure for notional interest has been found, the same rules as in EIM26270 apply to give relief for it.

Note: the release or writing off of a loan in connection with termination of employment is chargeable under Section 188 ITEPA 2003 (see EIM21746) and not Section 401 ITEPA 2003.