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A client intends to lend £100,000 to a friend. Interest will not be charged, but it is intended that the amount repayable will be linked to the consumer price index over the term of the loan, and adjusted for any tax that the lender will have to pay
A client wants to lend £100 000 to a friend. He proposes to charge no interest but wants to be protected from inflation and the cost of any taxation that may arise. He has proposed that the friend will pay back £100 000 adjusted for the increase in the consumer price index (CPI) over the term of the loan and also adjusted for any tax that HMRC might charge.
For example if the inflation element is likely to be charged to capital gains tax the “redemption premium” will be the increase in CPI x 100/72 to allow for 28% tax. The loan will be repayable when the friend sells his business which is an uncertain date in the future.
The friend is concerned that HMRC might argue that some or all of the redemption premium is interest (which would necessitate a grossing-up factor of...
