Many owner-managed businesses rely on shareholder loans to fund growth, acquisitions, or capital investment. While tax relief on interest paid on these loans can be valuable, it is subject to strict conditions—and in some cases, that relief can be lost unexpectedly.
This newsletter highlights the key conditions for relief, explains a common but often overlooked risk, and outlines practical points to consider before making changes to shareholdings.
When Is Interest Relief Available?
Tax relief may be available on interest paid on loans taken out to acquire shares in, or lend money to, a company—but only if all of the following conditions are met:
- The company must be a close company
A close company is broadly one that is controlled by five or fewer shareholders (or by its directors).
- The company must not be a close investment‑holding company
At the time the interest is paid, the company must exist wholly or mainly for the purpose of carrying on a trade or certain other qualifying activities, rather than primarily holding investments.
- No capital must have been “recovered”
If the shareholder is treated as having recovered capital from the company, interest relief can be reduced or eliminated—even if no actual loan repayment has been made.
- The individual must meet one of two personal conditions
- Full‑time working condition: The individual works for most of their time in the management or conduct of the company (or an associated company), and holds ordinary shares; or
- Material interest condition: The individual (together with associates) owns or controls:
- More than 5% of the ordinary share capital, or
- An entitlement to more than 5% of the assets available on a winding up.
Additional restrictions apply where a company exists wholly or mainly to hold investments or property.
The Capital Recovery Trap
The requirement not to recover capital is a major risk area.
Under tax legislation, if capital is regarded as having been recovered from the company, the shareholder is treated as having repaid that amount of the loan used to acquire the shares—even where no cash repayment has taken place. Interest relief is then restricted to the unpaid balance of the loan.
When can capital be treated as recovered?
Capital is deemed to have been recovered in several situations, including:
- A sale of ordinary shares
- A company purchase of its own shares
Where the transaction is not at arm’s length, the proceeds are treated as being equal to the market value of the shares. This is particularly significant because it means that even a gift of shares can restrict—or entirely eliminate—interest relief.
Worked Example: Gift of Shares to a Family Member
A director borrowed £250,000 in March 2019 to acquire a 25% shareholding in a trading company and successfully claimed tax relief on the loan interest over several years.
In January 2026, ten of those shares were gifted to a daughter. At that point, the market value of the ten shares was £300,000.
For interest relief purposes, the tax rules treat the director as having recovered the full £250,000 originally borrowed—even though:
- Only part of the shareholding was transferred
- No cash was received
Result:
The entire loan is treated as repaid, and no further interest relief is available going forward.
Practical Considerations
- Interest relief can be lost without warning
Changes to shareholdings—particularly gifts or transfers to family members—can have unintended tax consequences. - Capital gains tax must also be considered
A gift of shares generally triggers a disposal at market value for CGT purposes. However, gift relief under TCGA 1992 s165 may be available in appropriate circumstances, potentially deferring the CGT charge. - Advance planning is essential
Anyone claiming interest relief on shareholder loans should seek advice before:- Transferring shares
- Gifting shares to family members
- Selling shares below market value
- Agreeing to a company share buy‑back
Our Advice
Interest relief on shareholder loans is a valuable but fragile relief. Seemingly straightforward personal or succession planning decisions can inadvertently remove it entirely.
If shareholders are considering any changes to their shareholdings, or if there is concern about whether interest relief remains available, professional advice should be taken early to avoid unexpected tax costs.
For further guidance or a review of current arrangements, please contact our team.
Disclaimer
This content is for general information only and does not constitute tax, legal, or financial advice. Always seek advice from a qualified professional before making decisions based on your specific circumstances.
