These days you can borrow against your home and use the money for more or less whatever you want. If that’s to finance your business you can claim a tax deduction for the interest you pay. But if the property and therefore the loan is in joint names, will you lose half the tax relief?

Relief interest

Once upon a time HMRC allowed tax relief on interest paid by individuals on loans used for any purpose at all. Those days are long gone and there are now only a few situations where you can claim relief. One of these is, in the words of the legislation, for loans used to “buy interest in a close company.” However, the wording of the legislation is slightly misleading.

Buying an interest

Tax relief is allowed on loans to purchase ordinary shares, but it can also be claimed where you borrow money and then lend it to your company. The circumstances in which you can obtain tax relief are where you:

  • purchase ordinary shares in a company of which you own or will as a result of the purchase own 5% or more of its ordinary share capital. Where you own (or will own) less than 5% you must work for it full time; or
  • lend money to company for use in its business, e.g. as working capital.

The company must be a close company

Broadly, that’s one controlled by five or fewer persons (usually the shareholders) and not be an investment company. As the name suggests that’s one where its main activity is holding investments.

Paying the interest

Not surprisingly the rules only allow the person who pays the interest on a qualifying loan to claim the tax relief. On the face of it this could be an impassable hurdle if the only means of borrowing is to take a joint loan. Typically this might be the situation where the loan is secured on your home, i.e. it’s a mortgage, and the property is jointly owned. Lenders will only advance money where both property owners agree to the mortgage and usually both names are on the loan agreement.

Example. Henry lives with his long-time partner Hilda. Henry needs to raise some extra working capital for his company Acom Ltd of which he is the sole shareholder. They extend the mortgage on their home to provide the funds. HMRC will only allow 50% of the interest on the loan, even if Henry made all the repayments.

A drastic solution

If Henry and Hilda were married when the interest was paid on the mortgage HMRC takes a different approach. It would allow Henry tax relief on the whole of the interest whether he made all the repayments or they were paid out of a joint account.

An alternative solution

If tax relief on the loan wasn’t a sufficient incentive for Henry and Hilda to tie the knot they have another option.

Tip. Acom can issue shares to Hilda which will give her 5% of its ordinary share capital. Hilda can use the loan to buy the shares. If she has loan money left she can lend Acom the rest. Either way she’ll be entitled to tax relief on the interest. If Hilda doesn’t have enough income to use the tax relief Acom could pay her interest on the money she lends it, which also produces a tax-efficient result.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.