Income Tax Act 2007 section 408

Replacement loans

Section 408 deals with the tax treatment of a new loan taken out to repay an existing qualifying loan, ensuring that interest relief continues to be available on the replacement loan.

• A "replacement loan" is a new loan used to repay an existing loan that already qualifies for interest relief under sections 392, 396, 398 or 401 (loans to buy interests in close companies, employee-controlled companies, partnerships or co-operatives)
• The replacement loan and the original loan it repays are treated as a single loan for the purposes of the interest relief rules, except for the general eligibility provisions in sections 385 and 386
• Any restriction on relief due to recovery of capital under section 406 that applied to the original loan carries over and equally applies to the replacement loan
• When determining how the loan proceeds were used, the rules look at how the original loan was used, not the replacement loan — since the replacement loan was simply used to repay the earlier borrowing