BIM45755 - Specific deductions: interest: properties occupied rent free

Where:

• individual partners or directors borrow money to purchase land themselves,

and

• they permit the partnership or company to occupy the land rent free,

and

• the partnership or company pays the interest on the loan and charge it in their accounts

the interest may be allowable as a business expense of the trading entity.

In considering whether the interest is allowable, the normal rules of ICTA88/S74 (1)(a) will apply. Where the payment arises from the occupation of property used solely for trading purposes it will ordinarily constitute an allowable deduction.

There will be occasions when the interest will not be allowable either in part or in full. For example, where the interest payments exceed ordinary commercial consideration for the use of the property in the course of trade, it is unlikely they will have been incurred wholly and exclusively for the purposes of the trade. Or if the interest payments are in respect of a property used partly for business and partly for some other purpose, such as private occupation by a business proprietor, the deductions for tax purposes will be restricted to the business proportion.

The Schedule A rules for income tax cases were revised by FA95/S39 and FA95/SCH6. Payments of interest by the trading entity may constitute rent in the hands of the individual director or partner. However, a deduction may be given to the proprietor for interest payable even though someone else in fact pays it. The landlord will have an obligation to pay interest and that interest will have been paid by the tenant. We would therefore generally expect, following normal accountancy principles, to treat the proprietor's Schedule A profit in relation to this Schedule A business as nil.

Previously the treatment of property occupied rent-free was set out in SP4/85. However a review of current legislation demonstrated that SP4/85 was no longer required. Paragraph 8 of SP4/85 suggested that in the case of a company paying interest on the director's behalf, the amounts so paid out may be treated as part of the director's emoluments. Such a charge is unlikely to arise in practice. In most circumstances there will be no charge under ICTA88/S19 because the payment will not represent an emolument ’from' employment. Similarly if the payment of interest by the company is no more than fair commercial consideration for the use of the property there will be no benefit within the scope of ICTA88/S154.