Income Tax (Earnings and Pensions) Act 2003 section 177

Exceptions for loans at fixed rate of interest

Section 177 sets out the circumstances in which employment-related loans made at a fixed rate of interest are exempt from being treated as taxable cheap loans.

• A fixed rate loan made on or after 6 April 1978 is not a taxable cheap loan merely because the official rate of interest has risen since the year the loan was made, provided the interest paid in the year the loan was made was at least equal to what would have been due at that year's official rate.
• A fixed rate loan made before 6 April 1978 is not a taxable cheap loan if the loan's interest rate was at least equal to the arm's length rate that would have applied to a similar loan between unconnected parties at the time.
• A "fixed rate loan" is one made for a fixed period that cannot be changed, at a fixed rate of interest that cannot be altered during that period.
• These exceptions protect borrowers from a tax charge arising solely because market interest rates have moved upwards after the loan was originally taken out on commercially reasonable terms.