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While this adjustment might seem relatively small at first, this change will have a significant impact on some taxpayers.
The rate is used by HMRC to assess whether the interest rates applied on loans to employees are beneficial, for example the interest rate is lower than the official rate. Therefore, creating a taxable Benefit-in-Kind (a taxable benefit that arises when the interest charged on a loan falls below the official rate of interest set by HMRC).
Such loans, including notional loans from nil or partly paid shares, are often used by individuals as part of management incentive plans in private equity-backed businesses. Where it is common that due to the high value of acquiring shares in the business, the employer provides a loan that is repayable on an exit event from the business.
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An individual has taken out a £50,000 interest-free loan with their employer to purchase shares in the company. As no interest is charged on the loan a Benefit-in-Kind arises to the individual each tax year, with the employee receiving a P11D. |
Taxpayers should be aware of the increased tax cost associated with such beneficial loans and factor in the additional tax charge. Consideration might be given to repaying a portion of the loan to minimise the tax charge.
It should also be noted, that where total employer loans are below £10,000 no Benefit-in-Kind arises and therefore individuals may wish to manage amounts to this level to prevent any tax charges.
Existing loan arrangements should be reviewed to ensure that where an employee is currently incurring the official rate of interest on a loan, to prevent a Benefit-in-Kind, the revised interest rate does not cause any issues. For example, if the loan agreement did not track the official rate of interest but was set at 2.25%.
If you would like to discuss the impact of these changes, please contact Alex Conway or your usual Crowe contact.
