EIM26311 – The benefits code: beneficial loans: steadily reducing cheap loan: example
This example shows how to calculate the cash equivalent of a
steadily reducing cheap loan, using both the averaging method (see
EIM26220) and the precise method (see
EIM26230).
On 1 July an employer lends £5,300 to an employee, who
is not in excluded employment (see
EIM20007). The loan is used to buy a car
that is not used for any business purpose.
Interest is charged monthly on the balance of the outstanding
loan at 4%. Interest, together with capital at the rate of £45
a month, are deducted from the employee's salary, which is paid on
the last day of each month. By the end of the tax year the
outstanding balance was £4,895 and she had paid interest of
£153.54. She had no other loans.
The appropriate official rate of interest for the tax year
was 6 per cent.
For the purpose of the normal averaging method of calculating
the cash equivalent of the benefit of the loan, the loan was in
existence for nine complete months of the tax year (see
EIM26217).
Liability on the normal averaging method ( EIM26210 onwards)
|
|
|
|
|
|
|
£ |
|
| £5,300 + £4,895 |
x | 9 |
x | 6 | = |
229.38 |
|
| 2 |
| 12 |
| 100 |
|
|
|
| Less interest actually paid by the employee | 153.54 | ||||||
| Cash equivalent of benefit | 75.84 | ||||||
Liability on the alternative precise method (see EIM26230)
|
| £ |
|
| £5,300 for 31 days at 6% = | 27.00 | Note |
| £5,255 for 31 days at 6% = | 26.77 |
|
| £5,210 for 30 days at 6% = | 25.69 |
|
| £5,165 for 31 days at 6% = | 26.32 |
|
| £5,120 for 30 days at 6% = | 25.24 |
|
| £5,075 for 31 days at 6% = | 25.86 |
|
| £5,030 for 31 days at 6% = | 25.63 |
|
| £4,985 for 28 days at 6% = | 22.94 |
|
| £4,940 for 31 days at 6% = | 25.17 |
|
| £4,895 for 5 days at 6% = | 4.02 |
|
| Total | 234.64 |
|
| Less interest paid by the employee | 153.54 |
|
| Chargeable benefit | 81.10 | Round down to £81 |
Note: the computation for the first month is:
| £5,300
............. 0 | x | 31 | x | 6 | = | £27.00
............. 0 |
|
|
| 365 |
| 100 |
|
|
and so on for each succeeding month.
The normal averaging method of calculation, which would be
applied automatically, is to the employee's advantage. She would
not, therefore, make an election for the alternative precise method
(see
EIM26200 and
EIM26240).
This is a steadily decreasing loan, there are no
complications and no suggestions of any manipulation or avoidance.
The Inspector would not, therefore, give notice that he or she
wished to adopt the alternative precise method of calculation.
Note that for either method of calculation it is the
maximum outstanding balance on the appropriate day
that is taken into account. Thus, although the employee repays
£45 on the last day of the month it is the balance before the
repayment (that is the
maximum outstanding balance) that is taken into
account in the calculations.
The formula for calculating liability on the alternative
precise method at
EIM26235 could have been used to come to
the same result.
`S' in the formula would be
(£5,300 x 31) + (£5,255 x 31) ... + (£4,895 x
5) = £1,427,670
Using the formula the chargeable benefit is:
| 6 | x | 1,427,670 | minus | £153.54 | = | £81.10 |
| 100 |
| 365 |
|
|
|
|
The employee will be treated as having paid £75 interest on the loan in addition to the £153.54 actually paid. However, this will have no effect on her liability because none of the interest ranks for deduction or relief of any kind (see EIM26270).
