CFM5600a - Taxing loan relationships: connected persons and late interest: overview

Overview

Under the authorised accruals basis interest is relieved when it accrues, not when it is paid.

This could lead to a mismatch if

• the borrower gets relief when the interest accrues, and
• the interest is not paid for some time, and
• the lender, not being within FA 1996, is taxed on the interest

• only when it is received, rather than when it accrues, or
• is outside the UK tax net entirely.

Connected parties could arrange their affairs to take advantage of this mismatch. For this reason, FA96/SCH9/PARA2 postpones relief for the borrower, in certain circumstances, when interest is paid late.