How can I borrow tax efficiently?

How can I borrow tax efficiently?

For an expense to be allowed for income tax purposes it has to pass the general rule, which is that it must be incurred wholly and exclusively for the purpose of the profession.

You may have built up an uncomfortable level of debt, perhaps on credit cards or student loans, which you want to consolidate with a view to reducing the interest and extending the loan period. Whilst this is to be recommended, you should be careful of the timing. If the consolidating loan is taken out immediately or very shortly after commencing self-employment, the interest arising on the loan will not be eligible for tax relief. This is because you cannot demonstrate that the interest is paid wholly and exclusively for the purpose of your practice.

By contrast, if you take out a loan to finance the cost of your computer and this computer is used wholly for practice purposes, then the interest that you pay on the loan will be fully tax deductible.

When the amount of your fees owing to you (your debtors) have built up, you will be able to borrow against this debt to finance your practice. You could free up personal borrowings (on which you get no tax relief) and replace them with practice borrowings, the interest on which will (with careful planning) be eligible for tax relief. A word of warning: this should not be tackled without speaking to us first.

Remember, if you are raising finance to acquire an asset which is not used exclusively for practice purposes then the finance charges may be tax deductible only to the extent that the asset is used for the practice. For example, if you are buying a car, whether outright, by hire purchase, or a bank loan, if the car is only used, say, 50% for business purposes, then only 50% of the finance charge will be tax deductible. Again you should take advice from us first, because it may well be more advantageous to take out a general practice loan rather than a specific loan for the purchase of the car. Also, take care if you are considering entering into a lease or contract hire agreement, especially if the CO2 value is greater than 130g/km, as you will not get tax relief in full.

This answer was last checked May 2017. This answer is for general guidance only. It provides an outline, and may not include points which are important in your case. You should not rely on this answer without taking individual advice based on the full facts of your case. The information given was correct at the time of release.