Taxation (UK) · The comprehensive computation of corporation tax liability

Loan Relationships and Qualifying Charitable Donations in Corporation Tax

Updated 11 October 2026 · Fact-checked

A loan relationship is a company's borrowing or lending of money. Interest on trade borrowing is a trading expense. Net non-trading interest is taxed as non-trading loan relationship income. Qualifying charitable donations are deducted from total profits, not from trading profit, and cannot create or increase a loss.

Understand Loan Relationships and Qualifying Charitable Donations

A loan relationship exists when a company lends or borrows money. The company is either the lender (it earns interest) or the borrower (it pays interest). Bank deposits, bank loans, loan notes and debentures all count.

The key question is why the money was lent or borrowed. If the loan is for the purposes of the company's trade, it is a trading loan relationship. The interest paid is simply a deduction in the adjusted trading profit. If the loan is not for trade, it is a non-trading loan relationship. Examples are interest received on a bank deposit, or interest paid on a loan used to buy an investment property.

For non-trading loan relationships, you compute one net figure for the accounting period. Interest received and interest paid are both included. Interest is taken on the accruals basis, which means the amount that relates to the accounting period, not the cash paid or received. The net amount, if positive, is taxed as non-trading loan relationship income. It is not part of trading profit, so you must add back any non-trade interest in the adjustment of profits and show the net figure separately in the computation. Interest received in the accounts is also taken out of trading profit if it was included there.

A qualifying charitable donation is a payment by a company to a charity. The company does not need to deduct tax at source. The payment is made gross. It is deducted from total profits (income plus chargeable gains) to reach taxable total profits. It is not an expense of the trade, so you add it back in the adjustment of profits, then deduct it later in the computation. A donation can only reduce profits to nil. It cannot create a loss.

A gift of goods, or a small amount of advertising for a charity, is dealt with separately. The sections below deal with cash donations paid to charity, which is what the exam usually tests.

Key rules to remember

Trading loan relationship: Interest paid for trade purposes = deduction in adjusted trading profit; Interest received on trade bank accounts is also treated as trading and taxed within trading profit if it relates to the trade.
Non-trading loan relationship income: Interest receivable (accruals) − interest payable on non-trade loans (accruals) = net non-trading loan relationship income; If the result is positive, it is taxable. Keep it separate from trading profit in the computation.
Add back in adjusted trading profit: Add back non-trade interest paid; deduct non-trade interest received included in accounts profit; Avoids double counting, because non-trading interest is taxed under its own heading.
Total profits: Trading profit + non-trading loan relationship income + property income + chargeable gains (+ other income, excluding dividends from UK companies); Qualifying charitable donations are deducted from this figure.
Taxable total profits: Total profits − qualifying charitable donations paid in the period; Donations are deducted from total profits, not from trading profit. They cannot create a loss, and unrelieved amounts are lost.
Augmented profits: Taxable total profits + exempt dividends from non-group companies; Augmented profits are used for the corporation tax limits. The donation is already deducted in taxable total profits, so it reduces augmented profits too.

How to solve Loan Relationships and Qualifying Charitable Donations questions

Use the same order every time. It keeps trade and non-trade items apart and stops you deducting donations too early.

1Start with the accounts profit and check every interest item. Decide whether each loan is for trade purposes or not.
2Leave trading interest paid as a deduction in trading profit. Add back non-trade interest paid. Deduct non-trade interest received if it was credited in the accounts profit.
3Compute non-trading loan relationship income on the accruals basis. Use interest receivable less non-trade interest payable for the period.
4Add back any qualifying charitable donation that was deducted in the accounts, when you adjust trading profit.
5Build total profits: trading profit, non-trading loan relationship income, property income and chargeable gains.
6Deduct qualifying charitable donations paid in the period from total profits. Stop at nil. Do not create a loss.
7Check whether any exempt dividends affect augmented profits for the rate limits, then compute the corporation tax.

Quickest way: Three-line scan for interest and donations

When to use it: Use this in objective test questions, and as a check at the end of a Section C computation.

Ask for each loan: is it for the trade? If yes, it stays in trading profit. If no, it goes to the non-trading loan relationship line.
Net all non-trade interest into one figure. A positive figure is income. Check you used the accruals figure, not cash.
Deduct donations last, from total profits. If the donation is more than total profits, taxable total profits are nil and the excess is wasted.

Common mistakes in Loan Relationships and Qualifying Charitable Donations

Deducting qualifying charitable donations from trading profit.
The donation appears in the accounts as an expense, so students leave it there.
Fix: Add it back in the adjustment of profits. Deduct it later from total profits.
Leaving non-trade interest received in trading profit.
Bank interest is credited in the accounts profit and students forget to separate it.
Fix: Deduct it from accounts profit and show it as non-trading loan relationship income.
Using cash paid or received instead of the accrued interest.
Students copy the cash figure given in the question.
Fix: Use the amount that relates to the accounting period (accruals basis) unless the question says otherwise.
Adding back interest on a trade loan.
Students think all interest is disallowed.
Fix: Interest on borrowing for trade purposes is an allowable trading expense. Only non-trade interest is added back.
Letting a donation create or increase a loss.
Students treat the donation like a trading expense.
Fix: A donation is deducted only up to total profits. Taxable total profits cannot go below nil because of it.
Including a donation paid after the period end in the current period.
Students match it to the profits it was intended to reduce.
Fix: Deduct donations in the accounting period in which they are paid.

Worked examples

Example 1

Brook Ltd has a 12-month accounting period to 31 March 2026. Its accounts profit before tax is £200,000. This is after deducting interest of £6,000 on a loan used for trading purposes, interest of £4,000 on a loan used to buy an investment property, and a qualifying charitable donation of £5,000. It also includes bank deposit interest receivable of £9,000. Compute the non-trading loan relationship income and the taxable total profits, ignoring any other income.

Show the solution

Adjusted trading profit: start at £200,000.
Add back non-trade interest paid: £4,000. The trade loan interest of £6,000 stays deducted.
Add back the donation: £5,000.
Deduct bank interest receivable credited in the accounts: £9,000.
Trading profit = 200,000 + 4,000 + 5,000 − 9,000 = £200,000.
Non-trading loan relationship income = 9,000 − 4,000 = £5,000.
Total profits = 200,000 + 5,000 = £205,000.
Deduct the qualifying charitable donation of £5,000.
Taxable total profits = 205,000 − 5,000 = £200,000.

Answer: Non-trading loan relationship income is £5,000. Taxable total profits are £200,000.

Example 2

Cedar Ltd has an accounting period of 12 months to 31 December 2025. Its trading profit is £30,000. It has non-trading loan relationship income of £8,000. It paid a qualifying charitable donation of £50,000 in the period. What are its taxable total profits, and can the unrelieved donation be used elsewhere?

Show the solution

Total profits = trading profit 30,000 + non-trading loan relationship income 8,000 = £38,000.
Donation paid = £50,000.
The donation can only be deducted up to total profits, so the deduction is £38,000.
Taxable total profits = 38,000 − 38,000 = £0.
Unrelieved donation = 50,000 − 38,000 = £12,000.
A donation cannot create a loss and the excess is not carried forward or back, so it is wasted.

Answer: Taxable total profits are nil. The unrelieved £12,000 of the donation is lost and cannot be carried forward or back.

Exam tips

Always lay out a computation with separate lines for trading profit, non-trading loan relationship income, property income and gains. Marks are given for each line.
In a Section C computation, show the add-back of the donation and the later deduction separately. Examiners give marks for both.
In objective test questions, read the purpose of the loan first. The trade or non-trade label decides which answer is right.
Check the answer is not below nil after deducting the donation. If profits are nil, say so explicitly.
Use the rates in the tax rates tables given in the exam. Do not rely on memory for rates, but know the treatment rules.

Practice questions from The comprehensive computation of corporation tax liability

Loan Relationships and Qualifying Charitable Donations: frequently asked questions

What is the difference between a trading and a non-trading loan relationship?

A trading loan relationship is borrowing or lending for the purposes of the company's trade. Its interest is dealt with within trading profit. A non-trading loan relationship is any other loan. Its interest is netted and taxed as non-trading loan relationship income.

Are qualifying charitable donations deducted from trading profit?

No. They are added back when you adjust trading profit. They are then deducted from total profits to arrive at taxable total profits.

What happens if a donation is greater than total profits?

The deduction is limited to total profits, so taxable total profits are nil. The donation cannot create a loss. The excess is not relieved.

Is interest taxed when received or when accrued?

For loan relationships, you use the accruals basis. This means the interest that relates to the accounting period is included, whatever the date of payment or receipt.