Interest paid on qualifying loans is deducted from the taxpayer's total income (ie a Step 2 deduction from total income). See the Proforma income tax calculation guidance note.
Interest on qualifying loans is usually paid gross by the individual borrower; tax is not withheld at source. This includes interest payments made by the individual to peer-to-peer lenders. However, where the individual pays interest to an overseas lender, he may be required to deduct basic rate tax on this amount; it will depend on whether the lender has a UK permanent establishment. See Simon's Taxes A4.424 (subscription sensitive). ITA 2007, ss 874, 888E
Qualifying loan interest relief is included in the cap on unlimited income tax reliefs (see below).
What is a qualifying loan?
A qualifying loan is one where the capital amount has been used for a qualifying purpose.