Hi All,
Can someone advise on this scenario....
Wife lends 1,000 to husband to fund a new business
Business pays interest to wife
Wife declares interest income on tax return and so pays tax on it at her marginal rate. Husband declares interest cost on his return (business is sole trader) and so obtains tax relief
Is this what would happen in practice or does the fact that they are married affect things at all ?
Ta
Ta Doug
How would the taxman differentiate between the 2 ?
Ta
The rate of interest used Whether or not the husband needed to borrow the money Whether or not the husband gave the money to the wife to lend back to him
If IR considers it to be a sham then the interest is disallowed for the husband, and it's up to him to pursue the matter.
They would look at the reality. Do they have separate bank accounts and where does their income come from? Did it look a sensible commercial decision to borrow the money? Things like that.
If they suspect that the purpose of the loan was to avoid tax they would probably count the income on both tax returns.
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I don't think the IR can do that. It is certainly not *income* for the husband.
I would assume the main/sole purpose of this exercise is to obtain more tax relief (husband is 40% taxpayer?) than the income being assessed (wife is taxed at 0%/10%/20%?)?
But surely the *main* purpose of the loan is to avoid the company making necessary bank borrowing at a higher interest rate. If the principle was making enough profit from the business to be in the 40% bracket it's unlikely (but not impossible) to be a comercially justifed transacton
tim
It might or might not be the main purpose of the loan.
If the business (we don't know whether sole trader or limited company) requires a loan, why is the husband's tax bracket likely to defeat the claim for interest relief?
but if it isn't, then it won't be a comercially justified transaction will it?
Directly it's not, but it's going to be a good indicator. If the principal is making that much money then surely he should be loaning the money back himself? (I realise that there are some circumstances when this isn't going to be possible, but ISTM that if a wife lends some money to hubby's healthy company then it is rather likely to be simply as a tax saving dodge and hence covered by whichever act is is that covers this sort of thing - the name of which i always forget)
tim
tim
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