EIM26314 – The benefits code: beneficial loans: cheap loans some of which are subject to aggregation while others are not: example
This example shows how to calculate the cash equivalents of
cheap loans, some of which are subject to aggregation while others
are not, using both the averaging method (see
EIM26220) and the precise method (see
EIM26230).
A close company has for years advanced funds to a director at
3% interest payable quarterly on 31 March, 30 June, 30 September
and 31 December by deduction from salary. Each year it has made an
election for aggregation (see
EIM26180).
The balance on the loan account on 5 April preceding the year
of assessment was £29,000. The director repaid £1,000 on
30 June in the year of assessment, so that the balance at the end
of that year was £28,000.
Part of the loan balance was a loan of £3,000 made in
the preceding year of assessment to help him buy a car that he
needed to do his job. The car was used 40% for business travel.
£20,000 was a loan used to buy shares in a close
company. This loan meets all the conditions for relief under
Section 353 ICTA 1988.
Of the remainder of the loan balance £2,000 was used to
buy a season ticket and the other £4,000 outstanding at the
beginning of the year represented the balance of a loan to pay for
a holiday.
Of the total repayment £1,000, £200 was set against
the car loan, £500 against the share loan, £200 against
the season ticket loan and the other £100 against the holiday
loan.
The appropriate official rate was 10% throughout the year in
question.
All the loans are between the same borrower and lender. The
share loan is a qualifying loan on which all the interest is
eligible for relief and is therefore exempt (see
EIM26135). The other three loans require
a cash equivalent to be ascertained. Since the employer has elected
for aggregation the season ticket loan and the holiday loan, which
are non-qualifying (see
EIM26120), must be aggregated (see
EIM26180). So for the purposes of
calculating the total chargeable benefit there are two loans as
follows:
Type |
Balance at start |
Balance at end |
| Qualifying |
£3,000 |
£2,800 |
| Non-qualifying |
£6,000 |
£5,700 |
As the total balance outstanding exceeded £5,000 in the
year, exemption under Section 180(1)(a) ITEPA 2003 is not due (see
EIM26140). Since the total balance
outstanding on the non- qualifying loans exceeded £5,000 in
the year, exemption under Section 180(1)(b) is not due for those
loans (see
EIM26145).
Interest paid on the car loan for the year was:
| Date paid | Interest at 3% |
Paid £ |
| 30 June | One quarter on £3,000 = | 22.50 |
| 30 September | One quarter on £2,800 = | 21.00 |
| 31 December | One quarter on £2,800 = | 21.00 |
| 31 March | One quarter on £2,800 = | 21.00 |
| Total paid | 85.50 |
Interest eligible for relief under Section 353 ICTA 1988 will be as follows:
| Paid on | Amount | Eligible for relief | ||
| 30 June | £22.50 | £22.50 x 40% = |
£9.00 | |
| 30 September | £21.00 | £21.00 x 40% = |
£8.40 | |
| 31 December | £21.00 | £21.00 x 40% = |
£8.40 | |
| 31 March | £21.00 | £21.00 x 40% = |
£8.40 | |
| Total |
£34.20 | say £35 * |
Interest paid on the aggregated loans for the year was:
| Date paid | Interest at 3% |
Paid £ |
| 30 June | One quarter on £4,000 = |
30.50 |
| 30 September | One quarter on £5,700 = |
42.75 |
| 31 December | One quarter on £5,700 = |
42.75 |
| 31 March | One quarter on £5,700 = |
42.75 |
| Total paid |
158.25 |
Liability on the normal averaging method (see EIM26210)
(a) Car loan
|
£ |
||||||
| £3,000 + £2,800 |
x | 12 |
x | 10 |
= |
290.00 |
| 2 | 12 | 100 | ||||
| Less interest actually paid in respect of the car loan | 85.50 | |||||
| Chargeable benefit | 204.50 | |||||
(b) Aggregated loan
|
£ |
||||||
| £6,000 + £5,700 |
x | 12 |
x | 10 |
= |
585.00 |
| 2 | 12 | 100 | ||||
| Less interest actually paid in respect of the aggregated loan | 158.25 | |||||
| Chargeable benefit | 426.75 | |||||
Total cash equivalent = £204.50 + £426.75 = £631.25
Liability on the alternative precise method (see EIM26230)
a) Car loan
| Period |
£ |
|
| 6 April to 30 June (86 days) | £3,000 for 86 days at 10% = |
70.68 |
| 1 July to 5 April (279 days) | £2.800 for 279 days at 10% = |
214.02 |
| Total |
284.70 |
|
| Less interest actually paid in respect of the car loan | 85.50 | |
| Chargeable benefit |
199.20 |
|
b) Aggregated loan
| Period |
£ |
|
| 6 April to 30 June (86 days) | £6,000 for 86 days at 10% = |
141.36 |
| 1 July to 5 April (279 days) | £5,700 for 279 days at 10% = |
435.69 |
| Total |
577.05 |
|
| Less interest actually paid in respect of the aggregated loans | 158.25 | |
| Chargeable benefit |
418.80 |
|
Total cash equivalent = £199.20 + £418.80 = £618
Note: although the employee repaid £1,000 on
30 June, the maximum balances of the non- aggregated and aggregated
loans outstanding on the day were £3,000 and £6,000 and
these amounts have been taken into account in the alternative
precise method of calculation.
The normal averaging method of calculation, which would be
applied automatically (see
EIM26200), operates marginally to the
director's disadvantage. If he considers it worthwhile he could
make an election for the alternative precise method of calculation
(see
EIM26200).
The director will be treated as having paid £632 (or
£618 if an election for the alternative precise method is
made) interest on the loan in addition to the interest actually
paid (see
EIM26270). Relief will be due for the
notional interest as follows (assuming an election for the
alternative precise method is made):
Car loan - Interest treated as paid on 5 April
(see
EIM26270) £199.20 x 40% =
£79.68. Round up to £80 to be allowed as interest relief
in addition to relief in respect of the interest actually paid.
