Official Rate of Interest for Beneficial Loans – Reduction in the rate from 1 March 2009Monday, February 2nd, 2009
HMRC has announced a reduction in the official rate of interest from 6.25% to 4.75% from 1 March 2009.
An employment-related loan is a taxable benefit in a tax year if it is “beneficial”, i.e. it is provided at a rate of interest that is less than HMRC’s official interest rate. The cash equivalent of the benefit of an employment-related loan in a tax year is the difference between
- the amount of interest that would have been payable on the loan for that year if it had been calculated using the official rate of interest, and
- the amount of interest, if any, that was actually paid on the loan for that year.
The official interest rate is set annually by the Treasury and is intended to reflect general mortgage interest rates in force during each tax year. The rate since the start of the 2008/09 has been 6.25%, the same rate that has been in force since April 2007.
If there is a change in the official interest rate, HMRC’s practice is to make the change from the start of the tax year. However, if there is a significant fall in mortgage rates during a tax year, it may change mid-year. In the past, the change has always been made from the start of a tax month. The latest change is unusual in that it starts from the first day of a calendar month but there does not appear to be any statutory reason why such a change should not be made from any date.
Full information is provided by HMRC in form P11D(INT) towards the end of each tax year.
If a mid-year change is announced, the official rate for any particular loan is calculated by averaging the relevant rates over the number of days at each rate that the loan was outstanding.
The official interest rate for 2008/09 is 6.25% to from 6 April 2008 to 28 February 2009 (329 days), and 4.75% from 1 March to 5 April 2009 (36 days). The official rate for a loan that is outstanding
- for the whole of the 2008/09 tax year is 6.102%, i.e. (329 days × 6.25) + (36 days × 4.75) ÷ 365 days.
- from 1 August 2008 to the end of the tax year would be 6.032%, i.e. (212 days × 6.25) + (36 days × 4.75) ÷ 248 days.
The official interest rate in force at the start of each tax year is also used in calculating the cash equivalent of the provision of some living accommodation.
Beneficial loans: the official rate of interest
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