Qualifying/Non-Qualifying Loans: Examples

The beneficial loan rules set up a special category of loans called Qualifying Loans. The distinction between Qualifying and Non-Qualifying Loans is relevant in relation to:

Exemption from a charge to tax and liability for Class 1A NICs for Qualifying Loans on which the whole interest would be eligible for relief

Exemption for small loans

Where exemption from a charge to tax and liability for Class 1A NICs is not due, but would have been but for the existence of one or more Qualifying Loans, only the Qualifying Loans are taken into account for charging purposes.

Aggregation and non-aggregation of loans

The legislation governing beneficial loans provides for certain loans to be aggregated when calculating the cash equivalent. Only certain loans to directors may be aggregated.

Where an employer provides a cheap or interest-free loan to an employee that is a Qualifying Loan, then no entry is required on the P11D form. However, if the loan is not a qualifying loan, then an entry is required on the P11D form and Class 1A NICs are payable.

The following two examples illustrate some aspects of the beneficial loans rules and the distinction between Qualifying and Non-Qualifying Loans:

This graphic is explained in the accompanying text.

Example 1

In the current tax year, a female employee has three interest-free loans from her employer:

Loan Type	Nature of loan	Maximum outstanding balance during tax year
Loan for purchase of main residence	Qualifying	GBP 50,000
Loan for a holiday	Non-Qualifying	GBP 3,000
Loan for a transport season ticket	Non-Qualifying	GBP 2,000
	Total	GBP 55,000

Under the existing rules, the benefit of a beneficial loan is not chargeable to tax (or liable to Class 1A NICs) if the total balance outstanding on all beneficial loans does not exceed GBP 5,000 at any time in the year of assessment in question.

Since the maximum total balance outstanding in the year exceeds GBP 5,000, exemption is not due. However, apart from the Qualifying Loan, the maximum total balance outstanding in the year does not exceed GBP 5,000. Therefore, under the exemption for small loans rule, exemption is due for these two Non-Qualifying loans. Consequently, the Qualifying Loan will be charged as if it were the only beneficial loan.

This graphic is explained in the accompanying text.

Example 2

A male director for a close company has a number of loans from his company, at a 3% interest rate. The balance on the loan account on 5 April preceding the year of assessment was GBP 29,000, broken down as follows (in GBP):

o Loan for purchase of his only residence: 20,000

o Loan for car required for his work : 3,000

o Loan for a holiday: 4,000

o Loan for an annual season ticket: 2,000

The director repaid GBP 1,000 on 30 June in the year of assessment. Of this total repayment amount, GBP 200 was set against the car loan, GBP 500 against the house loan, GBP 200 against the season ticket loan, and GBP 100 against the holiday loan. This left a balance at the end of that year of GBP 28,000.

All the loans are between the same borrower and lender, and all require a cash equivalent to be calculated. The company elects that the loans should be treated as a single loan, where allowable. Consequently, the house loan, the season ticket loan and the holiday loan, which are non-qualifying, are aggregated.

Therefore, for the purposes of calculating the total chargeable benefit, there are two loans:

Nature of Loan	Balance at start of year (GBP)	Balance at end of year (GBP)
Qualifying (car)	3,000	2,800
Non-Qualifying: aggregated (House/Holiday/Season Ticket:)	26,000	25,200
Totals	29,000	28,000

As the total balance on all beneficial loans exceeded GBP 5000 in the year to be assessed, then no exemption is due.

Since the total balance outstanding on the Non-QualifyingLoans exceeded GBP 5000 in the year, the small loans rule exemption for Non-Qualifying Loans also does not apply.