EIM26221 – The benefits code: beneficial loans: calculation of the cash equivalent: example
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 £10,000. He makes regular repayments until 20 August, when he repays the amount then outstanding of £8,000. 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 |
£10,000 | ||
| Maximum amount outstanding on 20 August |
£8,000 | ||
| Add together and divide by 2 |
£18,000 |
divided by 2 = |
£9,000 |
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 |
at 4.5% |
| 6 July to 20 August = |
46 days |
at 5.5% |
| Total |
137 days |
Therefore the average official rate is:
| 91 | x 4.5% | plus | 46 | x 5.5% | = |
4.83% |
| 137 | 137 |
Step 3 – calculate the amount of interest payable at the official rate for the period for which the loan was.
|
£9,000 x 4.83% x 4 (note) | = | £144 (rounded down) |
|
12 |
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
£144 that is the cash equivalent of the loan benefit.
