(2) which are taxable cheap loans are outstanding in the year, the aggregate of the
amount outstanding on them) does not exceed £5,000.
(3) The £5,000 threshold for non-qualifying loans is not exceeded if at all times in
the year the amount outstanding on the loan (or if two or more employment-
related loans which are non-qualifying loans are outstanding in the year, the
aggregate of the amounts outstanding on them) does not exceed £5,000.
(4) In this section a “non-qualifying loan” means a taxable cheap loan which is not
a qualifying loan.
(5) For the purposes of this section a loan is a “qualifying loan” in relation to a
particular tax year if, assuming interest is paid on the loan for that year
(whether or not it is in fact paid), the whole or part of that interest—
(a) is eligible for relief under section 353 of ICTA (general provision for
relief for payments of interest, excluding MIRAS),
(b) would be eligible for relief under that section but for the fact that it is a
payment of relevant loan interest to which section 369 of ICTA applies
(mortgage interest payable under deduction of tax),
(c) is deductible in computing the amount of the profits to be charged
under Case I or II of Schedule D in respect of a trade, profession or
vocation carried on by the person to whom the loan is made, or
(d) is deductible in computing the amount of the profits to be charged
under Schedule A in respect of a Schedule A business carried on by that
Calculation of amount of interest at official rate
181 The official rate of interest
(1) “The official rate of interest” for the purposes of this Chapter means the rate
applicable under section 178 of FA 1989 (general power of Treasury to specify
rates of interest).
(2) Regulations under that section may make different provision in relation to a
(a) it was made in the currency of a country or territory outside the United
(b) the employee normally lives in that country or territory, and has
actually lived there at some time in the period of 6 years ending with
the tax year in question.
(3) Subsection (2) does not affect the general power under section 178(3) of FA
1989 to make different provision for different purposes.
182 Normal method of calculation: averaging
The normal method of calculating for the purposes of this Chapter the amount
of interest that would be payable on a loan for a tax year at the official rate is as
Calculate the average amount of the loan outstanding during the tax year—
1. Find the maximum amount of the loan outstanding on the 5th April
preceding the tax year or, if the loan was made in the tax year, on the date it
2. Find the maximum amount outstanding on 5th April of the tax year or, if the
loan was discharged in the tax year, on the date of discharge.
3. Add these amounts together and divide the result by 2.
If the official rate of interest changed during the period in the tax year when the
loan was outstanding, calculate the average official rate of interest for that
period as follows—
1. Multiply each official rate of interest in force during the period by the
number of days when it is in force.
2. Add these products together.
3. Divide the result by the number of days in the period.
Calculate the amount of interest that would be payable on the loan for the tax
year at the official rate as follows—
A is the average amount of the loan outstanding during the tax year
obtained from step 1,
I is the official rate of interest in force during the period in the tax year
when the loan was outstanding or, if the official rate changed, the
average official rate of interest obtained from step 2, and
M is the number of whole months during which the loan was outstanding
in the year.
For this purpose a month begins on the sixth day of the calendar month.
183 Alternative method of calculation
(1) The alternative method of calculating for the purposes of this Chapter the
amount of interest that would be payable on a loan for a tax year at the official
rate applies for a tax year—
(a) if the Inland Revenue so require, by notice to the employee, or
(b) if the employee so elects, by notice to the Inland Revenue.
(2) Notice may be given on or before the first anniversary of the normal self-
assessment filing date for the tax year in relation to which the question arises
whether the loan is a taxable cheap loan.
(3) The alternative method is as follows—
Find for each day in the tax year in question the maximum amount of the loan
outstanding on that day and multiply it by the official rate of interest in force
on that day.
Add together each of the amounts obtained under step 1.
Divide the result by the number of days in the tax year.
(4) Where in any tax year the cash equivalent of the benefit of the same taxable
cheap loan is to be treated as earnings of two or more employees then, for the
purposes of determining the cash equivalent of the benefit of the loan, the
alternative method applies if—
(a) the notice under subsection (1)(a) is given to all those employees, or
(b) the notice under subsection (1)(b) is given by all those employees.
Supplementary provisions relating to taxable cheap loans
184 Interest treated as paid
(1) This section applies where the cash equivalent of the benefit of a taxable cheap
loan is treated as earnings from an employee’s employment for a tax year
under section 175(1).
(2) The employee is to be treated for the purposes of the Tax Acts as having paid
interest on the loan in that year equal to the cash equivalent.
(3) But the employee is not to be treated as having paid that interest for the
purposes of this Chapter or of any of the other Chapters of this Part listed in
section 216(4) (provisions of the benefits code which do not apply to lower-
(4) The interest is to be treated—
(a) as accruing during the period in the tax year during which the
employee holds the employment and the loan is outstanding, and
(b) as paid by the employee at the end of the period.
(5) The interest is not to be treated—
(a) as income of the person making the loan, or
(b) as relevant loan interest to which section 369 of ICTA applies (mortgage
interest payable under deduction of tax).
185 Apportionment of cash equivalent in case of joint loan etc.
Where in any tax year the cash equivalent of the benefit of the same taxable
cheap loan is to be treated as earnings of two or more employees—
(a) the cash equivalent of the benefit of the loan (determined in accordance
with the provisions of this Chapter) is to be apportioned between them
in a just and reasonable manner, and
(b) the portion allocated to each employee is to be treated as the cash
equivalent of the benefit of the loan so far as that employee is
186 Replacement loans
(1) This section applies where an employment-related loan (“the original loan”) is
replaced, directly or indirectly, by—
(a) a further employment-related loan, or
(b) a loan which is not an employment-related loan but which in turn is, in
the same tax year or within 40 days after the end of the tax year,
replaced, directly or indirectly, by a further employment-related loan.
(2) In such a case, for the purposes of calculating the cash equivalent of the benefit
of the original loan under section 175(3), section 182 (normal method of
calculating interest at the official rate) applies as if the replacement loan, or
each of the replacement loans, were the same loan as the original loan.
(3) Where section 182 is applied as modified by subsection (2) then for the
purposes of section 175(3)(b) the amount of interest actually paid on the loan
for the tax year in question is the total of—
(a) the amount of interest actually paid on the original loan for that year,
(b) the amount of interest actually paid on the replacement loan or on each
of the replacement loans for that year.
(4) In this section a “further employment-related loan” means a loan which is an
employment-related loan made in relation to—
(a) the same or other employment with the person who is the employer in
relation to the original loan, or
(b) employment with a person who is connected with that employer.
187 Aggregation of loans by close company to director
(1) This section applies where, in relation to any tax year, there are employment-
related loans between the same lender and borrower which are aggregable
with each other.
(2) The lender may elect for aggregation to apply for that tax year in the case of the
(3) The effect of the election is that all the aggregable loans are to be treated as a
single loan for the purposes of—
section 175 (benefit of taxable cheap loan treated as earnings),
the provisions of this Chapter relating to the calculation of the cash
equivalent of the benefit of a taxable cheap loan, and
section 184 (interest treated as paid).
(4) For this purpose loans are aggregable for any tax year if they are made in the
same currency and all the following conditions are met in relation to each of
(a) there is a time in the tax year when—
(i) the loan is outstanding,
(ii) the lender is a close company, and
(iii) the borrower is a director of that company;
(b) at all times in the tax year the rate of interest on the loan is less than the
official rate applying at that time;
(c) the loan is not a qualifying loan within the meaning of section 180 (see
(5) An election under this section must be made by the lender in a notice given—
(a) to the Inland Revenue, and
(b) before 7th July after the end of the tax year to which the election relates.