Reshma Johar looks at the capital loss relief available on loans to a trader, focussing in this article on guarantors as opposed to lenders.
Loss relief for a guarantor is only available when a payment to a third party needs to be made by the guarantor of a qualifying loan to a trader.
A loan is not defined within the legislation; however, HMRC manuals confirm that they would accept that bank overdrafts and credit balances in directors’ loan accounts, would qualify.
Loss relief
Provided the loss is claimed, relief is available for capital gains tax (CGT) purposes. An allowable capital loss will automatically be offset against capital gains arising in the same tax year, before any tax-free annual exemption is deducted. Any unused losses will be carried forward and available for offset against future capital gains.
What is a qualifying loan?
- Loans 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 to be UK resident (sole trader, partner of a partnership or company).
- The debt is not a debt on security for the borrower. However, for a guarantor, the payment can be made in relation to a debt on a security.
Conditions for relief on payments made by a guarantor
- The loan has become irrecoverable from the borrower.
- The guarantor has made a payment under the guarantee, either to the lender or to a co-guarantor, relating to the amount.
- The payment under guarantee must be made under formal terms.
- The guarantor has not assigned the loan.
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The lender and borrower or guarantor 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
A capital loss cannot be utilised without a claim having been made. A claim can be made on a tax return or in writing to HMRC. The loss claim amount is the payment made under guarantee less any payments the guarantor received from any co-guarantors.
For individuals, claims should be made to HMRC within four years from the end of the tax year in which the payment was made. For companies, it would be within four years from the end of the accounting period in which the payment was made. It is not possible to backdate the claim to an earlier tax year.
Either way, the claim will need to detail when the loss arose. HMRC may raise queries if there is a small gap in time between the making of the loan and the date it became irrecoverable.
Other factors to consider
- The tax impact of any interest paid on the loan, both in terms of income tax and corporation tax.
- Loss relief is subject to restriction 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. 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. A claim is only made if one of the above conditions is met.
