§ Mr. CarringtonTo ask the Chancellor of the Exchequer how the Inland Revenue taxes loans which replace cheap or interest-free loans provided to employees by their employer.
§ Sir George YoungCheap or interest-free loans provided by employers are taxable benefits in kind. At present under, the technical rules introduced in 1976 to prevent avoidance, any loan which replaces a cheap or interest-free loan provided by an employer is also taxable, unless the replacement loan qualifies for exemption.
Some employers would like to stop providing cheap loans to staff. They want to do so by transferring their staff's existing loans to subsidiaries of commercial lenders set up for the purpose of giving replacement loans in such circumstances. However, the replacement loans from the subsidiary companies, which are on arm's length terms, could still be taxable. They would not be exempt as "commercial loans" because the subsidiary companies do not lend to the public.
In order to remove a possible obstacle to the provision of replacement loans to employees, we intend to propose legislation in the next Finance Bill. This would replace the rule which makes all replacement loans potentially taxable by new rules which focus more precisely on the potential for tax avoidance. The new rules would allow the subsidiary companies to provide replacement loans on arm's length terms without the replacement loans being taxable. We intend that this provision should apply from 6 April 1995.
The Inland Revenue is making available today a draft clause which would implement these changes. A copy of the draft clause will be placed in the Library of the House of Commons.