Loans applied in acquiring an interest in a company

Transcription

1 Loans applied in acquiring an interest in a company Updated November Content 2. Introduction 2 3. Section 11 Finance Act Scheme giving rise to the Finance Act 2003 amendment 3 5. Effect of Section 13 Finance Act Investor s position pre and post Finance Act 2003 but 3 pre Finance Act Scheme giving rise to Section 22 Finance Act Section 22 Finance Act Effect of Section 22 Finance Act Investors position pre and post Finance Act Effect of Section 9 Finance Act Definitions Relevant Legislation 6 1

2 2. Introduction Section 248 TCA 1997 provides for tax relief on interest paid on loans applied in acquiring equity in, or giving a loan to, certain types of companies Amendments to the relief have been made over the years culminating with Section 11 Finance Act Section 11 Finance Act 2011 Section 11 Finance Act abolishes the relief for interest paid on new loans made on or after 7 December 2010, and provides for the phasing out over the tax years 2011 to 2013 of the relief available for interest payable on existing qualifying loans (i.e. no relief available for the tax year 2014 and subsequent tax years). The effect of Section 11 Finance Act 2011 is that Section (a) does not apply, as respects interest paid on loans made on or after 7 th December 2010, (b) does not apply as and from 1 January 2014, as respects interest paid on loans made before 7 th December 2010, and (c) applies for the tax years 2011 to 2013, as respects interest on qualifying loans made before 7 th December 2010 as follows - (i) for the tax year 2011, 75% of the qualifying interest paid qualifies for relief, (ii) for the tax year 2012, 50% of the qualifying interest paid qualifies for relief, (iii) for the tax year 2013, 25% of the qualifying interest paid qualifies for relief. However, in applying the new provisions, Revenue will accept that a loan made after 7 December 2010 which is applied in paying off another loan which qualified for relief on 7 December 2010 will qualify for the apportioned (75% to 25% as above) relief for the tax years 2011 to 2013 where- the amount of the new loan does not exceed the balance outstanding as at 7 December 2010 on the loan being paid off, the term of the new loan does not exceed the balance outstanding of the term of the existing qualifying loan being paid off, the rate of interest of the new loan does not exceed the rate of interest on the loan being paid off, and 2

3 the interest payable under the terms of the new loan in each of the tax years 2011, 2012 and 2013 does not exceed the interest which would have been payable on the old loan in each of the tax years 2011, 2012 and Scheme giving rise to the Finance Act 2003 amendment The scheme giving rise to the introduction of Section 13 FA 2003 consisted of a company disposing of a building (which qualifies for capital allowances) to individuals before the end of the relevant capital allowances claw back period. As the building was disposed of before the end of the relevant capital allowances claw back period - the company suffered a claw back of the capital allowances at the CT rate of 12.5%; and the investors could claim the capital allowances over the remaining tax life of the building against all their income at their marginal rate probably 41%. 5. Effect of Section 13 Finance Act 2003 The effect of Section 13 Finance Act 2003 is that upon the sale or transfer by a company to individual investors of a specified building in respect of which a company has claimed capital allowances, the capital allowances relating to that building may only be offset against the rental income from that building. These capital allowances may not be offset against the investor s income from all sources including rental income from other properties and employment income as was previously the case. 6. Investor s position pre and post Finance Act 2003 but pre Finance Act 2004 Pre Finance Act 2003 The investor could claim capital allowances on the relevant building acquired against all his/her income (including employment income); plus relief against all rental income on the interest paid on the monies borrowed to purchase the relevant building. Post Finance Act 2003 The investor could claim - capital allowances on the relevant building acquired but only against the rental income from that property (i.e. the capital allowances due in 3

4 respect of the building are ring fenced to the income from that property); plus relief against all rental income on the interest paid on the monies borrowed to purchase the relevant building. 7. Scheme giving rise to Section 22 Finance Act 2004 Arising from Section 13 FA 2003, as the capital allowances on the relevant building are now ring fenced to the income derived from that building, a scheme was devised to enable the interest on the money borrowed to fund the purchase of the relevant building to be offset against the individual s total income (as distinct from being offset only against his/her rental income). The scheme involved - individuals setting up a company (generally called an intermediary company ); the individuals borrowing sufficient funds to purchase the relevant building and either investing that money in, or lending that money to, the intermediary company; the intermediary company using the money to purchase the relevant building; the intermediary company claiming the capital allowances against the rental income; the individuals who own the intermediary company claiming unrestricted relief (under Section 248 TCA 1997) against their total income (including employment income) on the interest paid on the monies borrowed. 8. Section 22 Finance Act 2004 Section 22 Finance Act 2004, which inserted a new Section 250A into the 1997 Taxes Consolidation Act, restricts the relief available to individuals under Section 248 of the Act in respect of interest paid on money borrowed for the purposes of acquiring equity in, or lending to, a company. The background to the Finance Act 2004 amendment is as follows Section 409E TCA 1997, as introduced by Section 13 Finance Act 2003, closed off a loophole in relation to the effective transfer of capital allowances on buildings in certain circumstances from companies to individuals; subsequently, Revenue became aware that arrangements were being put in place to circumvent the provisions of section 13 FA 2003 through the use of loan finance by investors in intermediary companies and hence the need for Section 22 Finance Act

5 9. Effect of Section 22 Finance Act 2004 The effect of Section 22 Finance Act 2004 is to ring fence the tax relief claimed on the interest paid on the individuals borrowings. 10. Investors position pre and post Finance Act 2004 Pre Finance Act 2004 The individuals could claim (under Section 248 TCA 1997) unrestricted tax relief against their total income (including employment income) on the interest paid on the borrowings used to invest in, or lend to, the intermediary company. Post Finance Act 2004 Under Section 250A TCA 1997 (as inserted by Section 22 FA 2004), the relief available under section 248 on interest paid on borrowings used to acquire an equity stake in, or lend money to, a company where those monies are used by the company to: (a) acquire a specified building essentially an industrial or commercial building with a remaining tax life for capital allowances; or (b) to pay off or replace money used to acquire such a building is restricted to the individual investor s return (e.g. distributions or interest received) from the intermediary company in respect of the specified amount. 11. Effect of Section 9 Finance Act 2006 The effect of Section 9 Finance Act 2006 is that the relief available under Section 248 does not apply to interest on loans made on or after 7/12/2005 which were used in acquiring shares in, or making a loan, to a company whose income consists wholly or mainly of profits or gains chargeable under Schedule D Case V. However, relief continues to be available in respect of interest on new loans made on or after 7/12/2005 used to pay off another loan which was used in acquiring shares in, or making a loan, to a company whose income consists wholly or mainly of profits or gains chargeable under Schedule D Case V, where the interest on the loan being paid off could have qualified for relief under Section 248 had the loan not been paid off and; the amount of the new loan is not greater than the balance outstanding on the loan being paid off; and the term of the new loan does not exceed the balance of the term of the loan being paid off. 12. Definitions Eligible Loan is a loan to an individual to defray money applied: 5

6 to acquire ordinary share capital of a trading or rental income company, or of a holding company of such a company, or in lending to such a company which is used wholly and exclusively for the purposes of the company or of a connected company, or in paying off another loan which could have qualified for relief had it not been paid off. Rental Company is a company that has 75% of its income consisting of profits or gains chargeable under Case V of Schedule D in respect of one or more specified buildings following the acquisition of a specified building. Specified Amount means the amount of the eligible loan, in whole or in part, which was applied by the individual and used by the company after 1 January 2003 in the acquisition of the relevant interest in a specified building, or in replacing money used for the acquisition of such an interest or in paying off such a loan. Specified Provisions means the provisions of Section 248 and as extended by Section 250 TCA Specified Building means an industrial building or structure, in the accepted sense for the purposes of Section 268(1), which qualifies for: (a) Industrial Buildings Allowances; or (b) Relief under any of the Area Based Incentives such as Urban and Rural Renewal schemes; or (c) Capital Allowances for buildings used for third level educational purposes or for buildings used for Certain Childcare purposes. 13. Relevant Legislation Section 248 TCA 1997 Section 250 TCA 1997 Section 250A TCA 1997 as inserted by Section 22 FA 2004 Section 409E TCA 1997 as inserted by Section 13 FA