Thin capitalisation

In this lesson

1. 0:00 Thin capitalisation anti-avoidance rules
2. 0:14 How excessive related-party loans work
3. 0:44 The bank comparison test explained
4. 1:34 Worked example: Precision Limited scenario
5. 2:24 Calculating allowable interest deductions
6. 2:50 Transfer pricing interaction with thin cap

About this lesson

You'll discover how to identify when a connected company loan exceeds what a bank would lend, calculate the allowable interest deduction, and understand why excess interest must be disallowed. This is essential for TX (Taxation) and applies directly to corporation tax calculations—a concept that frequently appears alongside transfer pricing in exam questions. Thin capitalisation prevents UK companies from obtaining excessive funding from related non-resident companies purely to secure a UK tax deduction for interest payments. The rule works by comparing the actual loan size to what an independent bank would have lent. If the connected company loan is larger, only the interest on the bank-lending amount is deductible; the excess interest must be added back to taxable profits. The lesson walks through a worked example where a company borrows £1 million from a non-resident subsidiary when a bank would only lend £750,000, showing how to calculate the allowable interest (on the £750,000 portion) and disallow the remainder. You'll also learn how thin capitalisation can overlap with transfer pricing adjustments—particularly when the interest rate charged exceeds the commercial market rate. Understanding both concepts together is crucial, as examiners often test them in combination within corporation tax scenarios. This knowledge directly supports your ability to advise on legitimate funding structures and identify tax planning risks in exam case studies.

Duration: 3m