Key facts
- All interest income and expenditure for companies is taxed under the loan relationships regime — not as standalone deductions.
- Loan relationship debits (interest paid) reduce taxable profits; credits (interest received) increase them.
- A loan relationship is trading if it arises for trade purposes, or non-trading otherwise.
- Special rules apply to loans between connected parties, including late interest and impaired debt provisions.
How Loan Relationships Are Taxed
A loan relationship exists whenever a company is a debtor or creditor in respect of a “money debt” that arises from the lending of money. In practical terms, this covers virtually every situation in which a company pays or receives interest.[1]
The loan relationships regime governs how the following are treated for Corporation Tax:
- Interest paid on bank loans, overdrafts, and director/shareholder loans
- Interest received on bank deposits, inter-company loans, and corporate bonds
- Discounts, premiums, and related finance costs
- Exchange gains and losses on foreign-currency borrowings
- Impairment losses (bad debts) on money owed to the company
Debits and Credits
The loan relationships rules use the terminology of debits (costs) and credits (income):[4]
| Type | Examples | Effect on Taxable Profit |
|---|---|---|
| Loan relationship debit | Interest paid, arrangement fees, exchange losses, impairment losses | Reduces taxable profit (a deduction) |
| Loan relationship credit | Interest received, discount income, exchange gains, reversals of impairment | Increases taxable profit (taxable income) |
The amounts brought into the tax computation generally follow the figures in the company’s accounts, prepared under GAAP (usually FRS 102). This “accounts-based” approach means the tax treatment typically mirrors the accounting treatment, with some important exceptions. The debits and credits feed into the computation when you prepare the CT600 online.
Trading vs Non-Trading Loan Relationships
Loan relationships are classified as either trading or non-trading, depending on their purpose:[1]
- Trading: A loan relationship is “for the purposes of the trade” if the borrowing funds trading activities (e.g. a bank loan to buy stock or fund working capital). The debits and credits are included in calculating trading profits.
- Non-trading: If the loan is not connected to the trade (e.g. interest earned on surplus cash deposits, or borrowing to buy an investment property), the debits and credits form part of the non-trading loan relationships pool.
Non-trading deficits: If non-trading debits exceed non-trading credits, the resulting non-trading deficit can be: (a) set against the company’s other profits of the same period; (b) group-relieved to another company; (c) carried back to the previous 12 months; or (d) carried forward against future non-trading profits.[1]
Connected Party Rules
When a loan relationship exists between connected companies (broadly, companies under common control or where one controls the other), special rules apply:[2]
- Impairment restriction: The creditor company cannot claim a debit for impairment (bad debt) on a loan to a connected party — the logic being that the creditor has some control over whether the debt is repaid
- Release of debt: If a connected-party debt is released (written off by the creditor), the debtor company does not bring in a taxable credit — preventing a tax charge on forgiveness of inter-company loans
- Amortised cost basis: Connected-party loans must generally be accounted for on an amortised cost basis for tax, even if fair value accounting is used in the accounts
Late Interest & Accrued Interest
Special rules prevent companies from obtaining a tax deduction for interest that is accrued but not actually paid, in certain situations:[2]
- Close company loans to participators: Where a close company accrues interest on a loan from a participator (typically a director-shareholder), the debit is only allowed when the interest is actually paid (not when it is accrued)
- Connected-party interest: Where interest is payable to a connected company, the paying company’s debit is matched to the period in which the receiving company brings in the corresponding credit — preventing timing mismatches
Practical tip: If your company has loans from its directors or parent company, ensure interest is actually paid (not just accrued) before the end of the accounting period to secure the tax deduction in that period.
Frequently Asked Questions
What is a loan relationship for Corporation Tax?
A loan relationship exists whenever a company is a debtor or creditor in respect of a money debt arising from the lending of money. It governs how all interest paid and received is treated for Corporation Tax.
Is interest paid by a company tax-deductible?
Yes. Loan relationship debits (such as interest paid on bank loans) reduce taxable profits. However, the interest must relate to a genuine borrowing, and special rules apply to connected-party loans and close company arrangements.
What is the difference between trading and non-trading loan relationships?
A loan relationship is trading if the borrowing funds trading activities (e.g. a bank loan for working capital). Non-trading relationships arise from investment activities, such as interest earned on surplus cash deposits.
Can a company claim bad debt relief on a connected-party loan?
No. The creditor company cannot claim a deduction for impairment (bad debt) on a loan to a connected party. This restriction applies because the creditor has some control over whether the debt is repaid.
Further Reading
- Non-Trading Income — how non-trading loan relationships fit into overall non-trading income
- Directors’ Loan Accounts — interest on loans between directors and their companies
- Section 455 Tax — the tax charge on loans to participators
- Trading Income for Companies — how trading loan relationships feed into trading profits
- Group Relief — surrendering non-trading deficits within a group
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