Changes to Alternative financing tax rules

Newsletter issue – December 2024

Tax rules for individuals and companies using alternative finance are to change. The Government released plans for reform on the day of the Autumn Budget, with the aim of simplifying the tax treatment of alternative finance and, in particular, refinancing arrangements.

The objective of the policy is to "ensure a level playing field across conventional and alternative of finance," the Government said.

In the policy paper, officials noted that these changes will ensure "where an existing asset is used as a means to raise finance using alternative finance, the tax outcome is broadly the same as conventional financing".

The changes also connect to Capital Gains Tax. It means a disposal for CGT purposes "does not occur when a beneficial interest in an asset is transferred by an individual to an alternative finance provider as a condition of funding", the HMRC papers stated, adding: "This outcome creates fairness and certainty for individuals as it ensures that they will not face a tax charge should they wish to use this form of finance. "

The paper continued: "Under the current tax rules, entering into certain types of alternative finance arrangements can result in tax consequences that do not arise under conventional financing. This issue mostly affects properties that do not qualify for Capital Gains Tax Private Residence Relief, such as rental properties, second homes and commercial properties."

According to HMRC, the changes will benefit, in particular, people with religious beliefs that prohibit receiving and paying interest, because they can not use other financing products currently.

The Finance Bill 2024-25 will include amending the relevant parts of three existing pieces of legislation:

• The Taxation of Chargeable Gains Act (TCGA) 1992
• Income Tax Act (ITA) 2007
• The Corporation Tax Act (CTA) 2009