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Interest as a Charge

Posted on: Tuesday, September 01, 2015

In order to pass the CAP 2 Tax Exam, you need to have a very detailed knowledge of Corporation Tax, Capital Gains Tax, Capital Acquisition Tax and Stamp Duty.  It is essential that you know
(a) the circumstances in which a Relief can apply,
(b) all the conditions for the Relief,
(c) if the Relief applies to the situation outlined in the exam question and
(d) the result of this relief for the company or individual.

Let's take Charges and in particular Interest on Borrowings used to Purchase Shares in another Company.

Interest on borrowings used to purchase shares in another company will be allowed as a charge only if the following conditions apply:

  • the borrowings have been used to acquire the ordinary share capital of a company,
  • the funds are used for the purpose of its trade or for the purchase, improvement or repair of Case V premises,
  •  the investing company has a material interest (more than 5%) in the company that uses the funds,
  • there is at least one director in common between the two companies, and
  • the investing company must not have recovered any capital from the company.
If in the exam question it's clear that the interest on borrowings used to purchase shares in another company is allowed as a charge, how does this affect the company?

You must conclude your answer by telling the Examiner that the interest will be allowed as a non-trade charge which means it will be allowed on a paid basis against the company's profits.



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