My client wants to use his personal funds to lend to the company instead of using a bank overdraft. What is the lowest acceptable interest rate that can be raised and obviously this interest received will be taxed in his hands. They mentioned using S12J b
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
From tax point of view there is no minimum rate of interest that must be used. It is only where section 7C, or section 31 of the Income Tax apply that there will be tax consequences if a rate lower than the official rate of interest is used.
The individual will use own funds and will therefore not have incurred interest. The company will be able to make a deduction under section 24J(2) of the Act and the interest accrues as gross income to the individual – section 24J(3).
The use of section 12J, which relates to the acquisition of shares in a qualifying company, doesn’t entitle the taxpayer to make a deduction of the interest incurred to fund the acquisition of the shares.