The cash equivalent of a beneficial loan is treated as a payment
of interest. This means that it can be claimed as a relief.
However, there is a limit on the amount that is treated as
paid for Section 401 ITEPA 2003 purposes. The limit is the amount
charged to tax
after applying the £30,000 threshold
described in
EIM13505.
A termination settlement made on 1 July 2003 consists of cash
£25,000 and a beneficial loan that is interest-free. Assume
that the cash equivalent of the loan in 2003/04 is £4,000 (
EIM26101 onwards).
The total of £29,000 is wholly covered by the
£30,000 threshold (leaving £1,000 carried forward, see
EIM13505).
As the amount charged to tax is nil, none of the cash
equivalent is treated as a payment of interest. So no claim for
interest relief can be made for 2003/04.
For 2004/05, assume that the cash equivalent of the loan is
£7,500. The amount charged to tax is £6,500 (£7,500
cash equivalent less £1,000 balance of threshold brought
forward). So the amount treated as a payment of interest is limited
to £6,500.
For 2005/06, assume that the cash equivalent of the loan is
£5,750. The total chargeable under Section 401 ITEPA 2003 is
£5,750. There is no balance of threshold brought forward, so
the whole £5,750 is treated as a payment of interest and
available for relief.
When the figure for notional interest has been found, the
same rules as in
EIM26270 apply to give relief for it.
Note: the release or writing off of a loan in
connection with termination of employment is chargeable under
Section 188 ITEPA 2003 (see
EIM21746) and not Section 401 ITEPA
2003.
