BIM45685 - Specific deductions: interest: security for the funds

The security for borrowed funds does not determine the use of those funds. It is very common in small businesses for loans to be secured on the proprietor’s home, because that is the only substantial owned asset. This is not relevant to the consideration of the use of the funds borrowed. Similarly guarantees given by another person do not affect the use of the funds.

Alternatively a loan may be secured on a business asset and yet be used for a non-business purpose (see example 3 at BIM45675 and example 3 at BIM45700).

Example

Mr Y has been driving an HGV for several years. He gets the opportunity to buy a nearly new vehicle for £25,000 if he can put down a deposit of £5,000. His home mortgage building society lets him borrow that money as he has equity of £20,000 in his house. The loan is secured on his house. This does not prevent the interest on the loan of £5,000 being accepted as incurred wholly and exclusively for business purposes, since the loan has been used to fund the acquisition of a business asset. The security is not relevant.