EIM26120 – The benefits code: beneficial loans: qualifying loans and non- qualifying loans

Sections 178 and 180(4) and (5) ITEPA 2003

The legislation sets up a special category of loans called qualifying loans. The distinction between qualifying and non-qualifying loans is relevant in relation to:

• exemption for loans the interest on which fully qualifies for tax relief (see EIM26135) and
• exemptions for small loans (see EIM26140 onwards) and
• aggregation and non-aggregation of loans (see EIM26180 onwards).

A qualifying loan is defined (Section 180(5) ITEPA 2003) as any loan such that, assuming interest is paid on it, the whole or any part of that interest:

• is eligible for relief under Section 353 ICTA 1988 ( RE330 onwards), or
• is deductible in computing the borrower's profits from a trade, profession or vocation carried on by him or her, or
• is deductible in computing the borrower's profits from a Property Income business (income from land in the UK) carried on by him or her.

Note that a loan to purchase land, such as a mortgage loan to buy a house, is not eligible for relief under Section 353 ICTA 1988.

An interest-free loan can be a qualifying loan. The issue is whether if interest had been paid any part of it would have been within any of the categories above.

Whether a loan is within the fifth bullet above is to be decided by the Inspector who deals with the accounts of the trade, profession or vocation concerned.

Loans that are not qualifying are referred to in the guidance that follows as non-qualifying loans (Section 180(4) ITEPA 2003).