What Tax Relief Is Available on Loans and Interest?
At some point in the life of nearly every business, additional funding becomes necessary. Whether you’re just starting out or looking to expand, securing finance—through personal funds, bank loans, or investment—is a key part of business development. But alongside the financial planning comes a vital question:
Can you claim tax relief on the interest paid?
The short answer is: Yes—but only in specific situations and under strict conditions. In this article, we explore when tax relief is available on business funding, the traps to avoid, and how to ensure you don’t miss out on legitimate tax deductions.
When Is Loan Interest Tax Deductible?
The guiding principle for tax relief is that the borrowed money must be used “wholly and exclusively” for business purposes—both at the time of borrowing and throughout the loan term.
If this condition is met, interest on the loan is typically deductible when calculating profits for:
- Sole traders or partnerships (deduction from trading profits)
- Companies (as a business expense, reducing corporation tax)
But that’s not all—interest relief is also available in more specific investment contexts.
1. Investing in a Close Company
You can claim tax relief on interest paid on a loan used to:
- Buy at least 5% of the ordinary share capital in a close company (a company controlled by five or fewer people)
- Lend money to a close company for use in its business
Conditions:
-
The company must be a trading company (not one that mainly holds investments)
- You must work for the company or own more than 5% of its ordinary share capital
- You must not also be claiming Enterprise Investment Scheme (EIS) relief on the investment
This can be a tax-efficient way to support your own business or that of a close family member—provided the rules are carefully followed.
2. Loans to Trading Companies or Partnerships
You may also claim relief if the loan is used to:
- Invest in a trading company (where the primary activity is commercial trading)
- Buy into a trading or professional partnership, as long as it’s not an investment LLP
These rules make it possible for professionals and entrepreneurs to claim interest relief on funding that helps them join or expand a business.
3. Property Investment Companies
Where a company’s business is renting property on a commercial basis, loan interest can also be deductible. This is relevant to landlords operating through a limited company.
However, if the property is not rented commercially (e.g., left empty or used by family), the tax relief may be denied or limited.
Beware: When Loans Become Non-Qualifying
Even if the loan initially meets the conditions, circumstances can change, and you could lose the relief.
Common pitfalls:
- Non-commercial loan terms: If the interest rate is too low or too high, HMRC may view the loan as non-arm’s length—disqualifying the interest.
- Use of funds changes: If you use part of the borrowed money for personal purposes, even temporarily, that portion of the loan loses its tax relief.
- No longer working for the company: If your involvement changes, you may no longer meet the conditions for interest relief.
It’s essential to monitor the loan use and terms over time, not just at the outset.
Private Use: Only Part of the Interest May Be Deductible
If an asset purchased with the loan is used partly for personal purposes, you can only claim tax relief on the business-use proportion of the interest.
Example:
You buy a vehicle for £30,000 using a personal loan. You use the vehicle 60% for business and 40% privately. Only 60% of the loan interest is tax-deductible.
Important: If you’re claiming the fixed-rate mileage deduction (e.g. 45p per mile for the first 10,000 miles), you cannot also claim interest or other costs associated with the vehicle.
Interest Relief Cap
Even where a loan qualifies, there is a cap on how much interest you can claim as a deduction each year:
- The greater of:
- £50,000, or
- 25% of your adjusted total income (your income after pension contributions and payroll giving)
This cap only applies to individuals, not companies.
Changes in Company Status: What If the Company Ceases to Be ‘Close’?
If the company grows and no longer qualifies as a “close company” (i.e., more than five people control it), your loan can still qualify for interest relief, as long as it was made while it was a close company.
This offers continuity of relief, even as the business evolves.
Summary: When You Can (and Can’t) Claim Tax Relief on Business Loan Interest
| Loan Used For | Interest Relief Available? | Key Conditions |
|---|---|---|
| Buying a business asset (wholly for business use) | ✅ Yes | Asset used solely for business |
| Investing in a close company (5%+ ownership) | ✅ Yes | Must work for the company or own 5%+ |
| Lending to a close company | ✅ Yes | Loan used for trading, not investment |
| Investing in a trading partnership | ✅ Yes | Not an investment LLP |
| Personal use of loaned asset (e.g., part personal car use) | ⚠️ Partly | Only business-use portion allowed |
| Loans with non-commercial terms | ❌ No | Must reflect market interest rates |
| Claiming fixed mileage on a car bought with a loan | ❌ No | Fixed-rate claims exclude all other costs |
Final Thoughts
Loan interest can be a valuable deduction, helping reduce your tax bill if you’re funding a new venture, investing in a company, or expanding a property business. But it’s crucial to structure and monitor the loan carefully.
If the loan doesn’t meet HMRC’s conditions—or your circumstances change—you could lose the relief entirely or trigger tax liabilities you didn’t expect.
At Merranti Accounting, we help business owners and investors structure loans correctly, track qualifying use, and avoid the traps that lead to non-qualifying loans.
Thinking of funding your business?
Contact Merranti Accounting today for expert advice on securing tax relief and structuring your business finance the right way.
