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Section 182 ITEPA 2003

This example shows how to calculate the cash equivalent of a beneficial loan using the averaging method (see EIM26210), and how to calculate the average official rate for part of a year.

Facts

A director has an interest-free loan from his company. The amount outstanding at the previous 5 April was 拢20,000. He makes regular repayments until 20 August, when he repays the amount then outstanding of 拢16,000. The averaging method of calculation applies as follows (the official rates for sterling loans are, for this example, 4.5% from 6 April to 5 July and 5.5% thereafter).

Calculation

Step 1: calculate the average amount of the loan outstanding:

• maximum amount outstanding on previous 5 April = 拢20,000
• maximum amount outstanding on 20 August = 拢16,000
• 拢20,000 + 拢16,000 = 拢36,000 梅 2 = 拢18,000

Step 2: calculate the average official rate for the period 6 April to 20 August (both dates inclusive):

• 6 April to 5 July = 91 days 脳 4.5%
• 6 July to 20 August = 46 days 脳 5.5%
• total number of days = 137 days

Therefore the average official rate is: (91 梅 137) 脳 4.5% + (46 梅 137) x 5.5% = 4.83%

Step 3 - calculate the amount of interest payable at the official rate for the period for which the loan was:

• (拢18,000 脳 4.83% 脳 4 (note)) 梅 12 = 拢289 (rounded down)

Note: 4 is the number of whole months during which the loan was in existence in the year of assessment, see EIM26217).

Finally, deduct any interest paid by the employee from the 拢289 that is the cash equivalent of the loan benefit.