EIM26314 - The benefits code: beneficial loans: cheap loans some of which are subject to aggregation while others are not: example
This example shows how to calculate the cash equivalents of cheap loans, some of which are subject to aggregation while others are not, using both the averaging method (see EIM26220) and the precise method (see EIM26230).
A close company has for years advanced funds to a director at 2% interest payable quarterly on 31 March, 30 June, 30 September and 31 December by deduction from salary. Each year it has made an election for aggregation (see EIM26180).
The balance on the loan account on 5 April preceding the year of assessment was 拢38,000. The director repaid 拢2,000 on 30 June in the year of assessment, so that the balance at the end of that year was 拢36,000.
Part of the loan balance was a loan of 拢6,000 made in the preceding year of assessment to help the director聽buy a car that they needed to do their聽job. The car was used 40% for business travel.
拢20,000 was a loan used to buy shares in a close company. This loan meets all the conditions for relief under section 383 ITA 2007.
Of the remainder of the loan balance 拢4,000 was used to buy a season ticket and the other 拢8,000 outstanding at the beginning of the year represented the balance of a loan to pay for a holiday.
Of the total repayment of 拢2,000, 拢400 was set against the car loan, 拢1,000 against the share loan, 拢400 against the season ticket loan and the other 拢200 against the holiday loan.
The appropriate official rate was 3.25% throughout the year in question.
All the loans are between the same borrower and lender. The share loan is a qualifying loan on which all the interest is eligible for relief and is therefore exempt (see EIM26135). The other three loans require a cash equivalent to be ascertained. Since the employer has elected for aggregation the season ticket loan and the holiday loan, which are non-qualifying (see EIM26137), must be aggregated (see EIM26180). So for the purposes of calculating the total chargeable benefit there are two loans as follows:
| Type | Balance at start | Balance at end |
|---|---|---|
| Qualifying | 拢6,000 | 拢5,600 |
| Non-qualifying | 拢12,000 | 拢11,400 |
As the total balance outstanding exceeded 拢10,000 in the year, exemption under section 180(1)(a) ITEPA 2003 is not due (see EIM26140). Since the total balance outstanding on the non- qualifying loans exceeded 拢10,000 in the year, exemption under section 180(1)(b) is not due for those loans (see EIM26145).
Interest paid on the car loan for the year was:
| Date paid | Interest at 2% calculation |
|---|---|
| 30 June | One quarter on 拢6,000 = 拢30.00聽 |
| 30 September | One quarter on 拢5,600 = 拢28.00 |
| 31 December | One quarter on 拢5,600 = 拢28.00 |
| 31 March | One quarter on 拢5,600 = 拢28.00 |
- Total paid: 拢30.00 + 拢28.00 +聽拢28.00 + 拢28.00 = 拢114.00
Interest eligible for relief under section 383 ITA 2007 will be as follows:
| Paid on | Amount | Eligible for relief |
|---|---|---|
| 30 June | 拢30.00 | 拢30.00 脳 40% = 拢12.00 |
| 30 September | 拢28.00 | 拢28.00 脳 40% = 拢11.20 |
| 31 December | 拢28.00 | 拢28.00 脳聽40% = 拢11.20 |
| 31 March | 拢28.00 | 拢28.00 脳聽40% = 拢11.20 |
- Total paid: 拢12.00聽+ 拢11.20聽+聽拢11.20聽+ 拢11.20聽= 拢45.60 (say 拢46.00)聽
Interest paid on the aggregated loans for the year was:
| Date paid | Interest at 2% calculation |
|---|---|
| 30 June | One quarter on 拢8,000 = 拢40.00 |
| 30 September | One quarter on 拢11,400 = 拢57.00 |
| 31 December | One quarter on 拢11,400 = 拢57.00 |
| 31 March | One quarter on 拢11,400 = 拢57.00 |
- Total paid: 拢40.00 + 拢57.00 +聽拢57.00 + 拢57.00 = 拢211.00
Liability on the normal averaging method (see EIM26210)
(a) Car loan calculation:聽
- ((拢6,000 + 拢5,600) 梅聽2)聽脳聽(12 梅 12)聽脳 3.25% = 拢188.50
- less interest actually paid in respect of the car loan: 拢114.00
- chargeable benefit =聽拢74.50
(b) Aggregated loan calcualtion:聽
- ((拢12,000 + 拢11,400) 梅聽2) 脳 (12 梅聽12) 脳聽3.25% = 拢380.25
- less interest actually paid in respect of the aggregated loan: 拢211.00
- chargeable benefit = 拢169.25
- total cash equivalent:聽拢74.50 + 拢169.25 = 拢243.75
Liability on the alternative precise method (see EIM26230)
a) Car loan:
| Period | 颁补濒肠耻濒补迟颈辞苍听 |
|---|---|
| 6 April to 30 June (86 days) | 拢6,000 for 86 days at 3.25% = 拢45.94 |
| 1 July to 5 April (279 days) | 拢5,600 for 279 days at 3.25% = 拢139.11 |
- total: 拢45.94 + 拢139.11 = 拢185.05
- interest聽paid in respect of the car loan: 拢114.00
- chargeable benefit =聽拢71.05
b) Aggregated loan:
| Period | Calculation |
|---|---|
| 6 April to 30 June (86 days) | 拢12,000 for 86 days at 3.25% = 拢91.89 |
| 1 July to 5 April (279 days) | 拢11,400 for 279 days at 3.25% = 拢283.20 |
- total: 拢91.89聽+ 拢283.20聽= 拢375.09
- interest actually paid in respect of the aggregated聽loans: 拢211.00
- chargeable benefit =聽拢164.09
- total cash equivalent: 拢71.05 + 拢164.09 = 拢235.14
Note:although the employee repaid 拢2,000 on 30 June, the maximum balances of the non- aggregated and aggregated loans outstanding on the day were 拢6,000 and 拢12,000 and these amounts have been taken into account in the alternative precise method of calculation.
The normal averaging method of calculation, which would be applied automatically (see EIM26200), operates marginally to the director's disadvantage. If they consider聽it worthwhile they could make an election for the alternative precise method of calculation (see EIM26200).
The director will be treated as having paid 拢243 (or 拢235 if an election for the alternative precise method is made) interest on the loan in addition to the interest actually paid (see EIM26270). Relief will be due for the notional interest as follows (assuming an election for the alternative precise method is made):
Car loan: Interest treated as paid on 5 April (see EIM26270) 拢71.05 脳 40% = 拢28.42. Round up to 拢29 to be allowed as interest relief in addition to relief in respect of the interest actually paid.