Employment Income Manual

EIM26251 - The benefits code: beneficial loans: what interest is taken into account: interest capitalised

Interest capitalised

Banks and other lending institutions sometimes 바카라 사이트渞oll up바카라 사이트� or capitalise outstanding interest and by doing so the interest due on the loan is effectively cancelled and replaced by a commensurate increase in the amount of the outstanding capital on which the bank charges compound interest, but this process of capitalisation does not mean interest has been 바카라 사이트減aid바카라 사이트� (s175(2)(b)) to avoid a loan benefit charge.

Whether or not in these circumstances interest had been paid was considered in Paton (as Fenton바카라 사이트檚 Trustee) v CIR (21TC626) decided in the House of Lords in 1938. Lord MacMillan described the bank바카라 사이트檚 practices in such cases as a 바카라 사이트渇iction바카라 사이트� (page664) 바카라 사이트�

바카라 사이트�바카라 사이트� the origin of this agreeable fiction whereby debts are to be deemed to be paid without payment may be traced historically to the ingenuity of lenders in devising methods of obtaining compound interest without contravening the usury laws. This method of dealing with loan accounts 바카라 사이트�. survived the abolition of the usury laws and is well established as the ordinary usage prevailing between bankers and customers who borrow from them and do not pay interest as it accrues.바카라 사이트�

He went on to distinguish this 바카라 사이트渇iction바카라 사이트� from the 바카라 사이트渇act바카라 사이트� of real payment 바카라 사이트�

바카라 사이트淣ow it may well be that as between a bank and its customer this method of dealing may have the result that the accrued interest which the bank has with the customer바카라 사이트檚 assent added to the principal loan thereby ceases to be due or recoverable as interest, but becomes merged in the principal loan. But has it been 바카라 사이트減aid바카라 사이트�? 바카라 사이트�바카라 사이트�In my opinion this means that the taxpayer must really, and not merely notionally, have paid the interest; there must be payment such as to discharge the debt; the payment must be a fact not a fiction.바카라 사이트�

In conclusion he stated (page 666) -

바카라 사이트淚t may well be that in a question between a bank and its customer 바카라 사이트�.. the interest accruing annually may by the sanctioned method of accounting cease to be interest when it is accumulated with the principal, so that the bank can thereafter no longer sue for the interest as interest. 바카라 사이트�바카라 사이트�. But it is manifest that it is only by a legal fiction that the interest in such cases 바카라 사이트� can be said to have been paid. After, as before, the striking of the balance the same sum remains due, no longer, it may be, as interest, but still due as part of the principal debt.바카라 사이트� what the Income Tax Acts requires 바카라 사이트� is that the sum due as interest shall have been actually discharged, not merely constructively paid.바카라 사이트�

The appeal was dismissed unanimously by the House of Lords. Paton바카라 사이트檚 case is still regarded as the foremost authority on this issue and is quoted in numerous other cases (e.g. CIR v Oswald (as trustee of the Cosier Settlement) 26TC435) and Minsham Properties Ltd v Price (63TC570). In the Oswald case, Lord Porter added his own succinct definition of 바카라 사이트渃apitalisation바카라 사이트� (page 459) -

바카라 사이트淐apitalisation means no more than that interest, which continues to be interest, shall be treated together with the capital sum due as itself interest-bearing, but does not alter its quality as interest.바카라 사이트�