Reshma Johar looks at the capital loss relief available on loans to a trader: relief can be available to either the lender or guarantor; this month focuses on the lender.
Generally, debts are not chargeable assets for capital gains tax (CGT) purposes, except debts on a security. Loss relief for a lender is only available when a loan becomes irrecoverable. This will depend on the circumstances and facts.
A loan is not defined within the legislation; however, HMRC’s Capital Gains manual (at CG65932) confirms that bank overdrafts and credit balances on directors’ loan accounts are capable of qualifying.
Loss relief
Provided a loss is successfully claimed, CGT relief is available. An allowable capital loss will be automatically offset against capital gains arising in the same tax year, before any tax-free annual exemption is deducted.
Any unused loss is carried forward and available for offset against future capital gains.
What is a qualifying loan?
- The loan was wholly for the purposes of a trade, profession or vocation, including the setting up of a trade (which does not consist of or include the lending of money). This will also include money used by the borrower to set up a trade, which is subsequently carried on by them.
- Loans made before 24 January 2019 require the borrower (sole trader, partner of a partnership or company) to be UK resident.
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The debt is not a debt on security for the borrower.
What are the conditions for claiming relief on an irrecoverable loan?
- The loan was not taken into account in computing income for the purposes of income tax or corporation tax.
- The loan has not been assigned.
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The lender and borrower were not each other’s spouse or civil partner, or companies in the same group when the loan was made or at any subsequent time.
Claims for loss on an irrecoverable loan
A capital loss cannot be used without a claim having been made. A claim can be made on a tax return or by writing into HMRC. The loss can be treated as arising when the claim is made, or at an earlier time if:
- the amount became irrecoverable at the earlier time; and
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the earlier time is not more than two years before either the year of assessment (for individuals) or the accounting period (for companies).
Either way, the claim will need to detail when the loss arose. HMRC may raise queries if there is a time gap between the making of the loan and the date it became irrecoverable.
Other factors to consider
- The tax impact from any interest paid on the loan, both in terms of income tax and corporation tax.
- Loss relief would be restricted if the loan had partly been used for non-trade purposes.
- If, following a claim, either the lender or guarantor recovers any amount, it will be treated as a chargeable gain equal to the proportion of the loss which was claimed (NB. this could be money or money’s worth).
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Care is needed to ensure the loan was not satisfied by other means, such as the issue of shares or securities.
Practical tip
The loan made by the lender needs to be monetary. Relief is only available when the loan becomes irrecoverable.
