Tax relief can be claimed when an individual borrows money to invest in their company, if certain conditions are satisfied. The borrowed funds might be used (for example) to purchase additional ordinary shares in the company, or to lend money for the company’s business use.
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Meeting the conditions
The conditions for tax relief to be available for interest paid on commercial loans for the above purposes include:
- The company is a ‘close’ (i.e., essentially closely-controlled) company.
- The company is not a ‘close investment-holding company’ (i.e., broadly it exists wholly or mainly for the purpose of a trade or certain other specified purposes) when the interest is paid.
- The individual has not recovered capital from the company (other than recovered capital treated as a loan repayment).
- The individual satisfies either the ‘full-time working’ or ‘material interest’ conditions.
The ‘full-time working’ condition is satisfied broadly through the ownership of ordinary shares and by the individual working for the greater part of their time in the actual management or conduct of the company (or an associated company). A ‘material interest’ is broadly defined by reference to owning or controlling more than 5% of the ordinary share capital, or by entitlement to more than 5% of the assets available for distribution on a winding up.
Ownership by (or the entitlement of) an ‘associate’ is included for these purposes. Additional conditions apply if the company exists wholly or mainly to hold investments or other property (ITA 2007, ss 392-395).
The ‘capital recovery’ trap
The condition in the third bullet point represents a potentially unexpected trap. If capital is recovered from the company, the borrower is treated as having repaid that amount of loan to the lender, irrespective of whether a repayment has been made. Consequently, interest relief is only available on the remainder of the loan which is not treated as having been repaid (ITA 2007, ss 406-407).
Capital is treated as recovered for interest relief restriction purposes if (among other things) the ordinary shares are sold, or on a company purchase of own shares. For disposals not at arm’s length, the proceeds are treated as equal to the market value of the relevant shares (ITA 2007, s 407(4)). This market value rule effectively means that even a gift of shares can result in interest relief being restricted or eliminated.
Example: Gift of shares to daughter
Andrew took out a bank loan in March 2019 to buy 25 ordinary shares in a trading company of which he was director, from another shareholder for £250,000. He subsequently owned 25% of the company’s shares, with three other director shareholders owning 25% each.
Andrew claimed tax relief for the loan interest paid on his tax returns. In January 2026, Andrew gifted ten shares to his daughter, Mary. The company’s shares had increased in value. The market value of ten shares was £300,000. For interest relief purposes, despite retaining 15 shares, Andrew is treated as having recovered all the £250,000 bank loan to purchase his 25 shares. Accordingly, Andrew cannot claim any further loan interest relief.
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Practical tip
In the above example, Andrew also faces a capital gains tax (CGT) liability on his gift of the shares, as a market value rule also applies on the gift of shares for CGT purposes. However, a possible claim for gift relief (under TCGA 1992, s 165) might be considered.
