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Although there’s been an unprecedented amount of support for businesses struggling due to Covid-19 at the start of the crisis there were delays in the various schemes being set up. Additionally, a high number of newer businesses were ineligible. Many business owners used personal borrowings to help keep afloat and pay employees, as banks removed credit products from the market.
A simple case study can serve as an example. A company owner has three employees. He and his wife (not involved with the company) re-mortgaged their house to raise funds and loaned this to the company, enabling him to keep trading and paying one of his employees. The other two employees were furloughed, and some of the funds were used to top up their salaries to 100% of the usual rate.
The owner will be able to claim tax relief for the interest paid on the re-mortgage. This will be proportionate to the amount loaned to the company compared to the overall borrowing level. For example, if the interest on the whole mortgage for a tax year was £10,000, the average balance £500,000 and the average balance of the loan to his company was £100,000, the owner can claim tax relief on £2,000 of interest (100,000/500,000 x £10,000).
The fact that the loan is in joint names would appear to introduce a complication, i.e. that relief may be restricted to 50% of the relevant interest. However, HMRC's guidance on this indicates that this is not the case:
"Where a husband and wife take out a joint loan but only one spouse uses the loan in a form that meets the qualifying conditions, that spouse would be entitled to full relief on the relevant amount of interest paid, even if the joint liability is satisfied out of a joint account." Click here for the full guidance document.
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