Many property investors lend to other property companies via their company, often in a Joint Venture approach because 100% LTV isn’t available.

Their property business could have losses from their trading activity but the losses can’t be offset against interest received unless its an integral part of the business.

General test – whether an integral part of the business

The general test is that interest normally rank as trade receipts only where it is an integral part of the business operations to employ capital to produce such income, for example, in the case of banks and other financial concerns.

HMRC practice regarding interest

In the particular case of interest on investments, the HMRC view is that interest on an investment may be treated as trading income if:
# the investment is for a short term and
# it is an integral feature of the trading activity to make such an investment and
# the funds deposited can be regarded as continuing to be employed in the business and to form part of the current working capital.

Investments made in the course of banking, insurance and other financial trades will normally meet these conditions.

Investments by non-financial concerns are unlikely to meet these conditions, if for example they:

# endure from one period of account to another, or
# represent capital even if it is only temporarily surplus to requirements, or
# although short term, represent part of a series of deposits which together constitute a long term setting aside of part of the capital.

The rules are in

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim62201

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim40800

https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm32020

https://www.legislation.gov.uk/ukpga/2009/4/section/298

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim40805

 

steve@bicknells.net