As a consequence of unpredicted factors affecting the economy in recent years, many businesses found themselves in need of additional funding to meet their cash flow needs. The loans may have been borrowed from financial institutions but in many cases, friends, family and personal funds of the business owner were the source of the loans. Sadly for some, even this was not enough to weather the storm with the result that businesses prematurely ceased to trade, leaving trading loans unrepaid.
In a scenario such as this, where a loan is made to a trader that cannot be repaid, it may be possible for the lender to make a claim for a capital loss on the unrecovered amount.
To make a successful claim of this nature, the loan must be a qualifying loan and have become irrecoverable. These two elements are discussed below.
For the purposes of tax relief, a qualifying trading loan must meet the following conditions:
- The money lent by the borrower must have been used wholly for the purposes of trade which will be evidenced by the facts of the case subsequent to the loan being made
- The loan is not a debt on a security (a marketable financial asset which is subject to separate CGT rules)
- For loans made prior to 24 January 2019, the borrower must be UK resident
To summarise the position, a capital loss claim may be made where:
- The loan was a qualifying trading loan
- The loan became irrecoverable
- The claimant has not assigned their right to recover the amount
- The borrower and lender are not spouses or civil partners and that condition is met from the date the loan was made and at all subsequent times
- The claim relates only to the principal of the loan and not any unpaid interest
The question of whether a loan is irrecoverable depends on whether there is any realistic hope of it being repaid, the argument for which may well be subjective. HMRC will take a view on whether there are any funds available or potentially available to the lender in the future and where they determine that the loan may be repaid, tax relief will be denied.
Once satisfaction has been gained that the loan is irrecoverable, evidence must exist that the loan became irrecoverable, i.e. if the circumstances speak to the fact that there was no realistic prospect of the loan being repaid at the time it was made, again relief will be denied. This can be of particular relevance to business owners who will continually lend money to their companies to support it, despite their perilous financial position.
Tax relief will also be denied if the loan has become irrecoverable as a consequence of the terms of the loan or through the acts or omissions of the lender, such as the assignment of the loan. HMRC have routinely denied loss relief claims where genuinely irrecoverable loans have been written off by lender prior to making a loss relief claim. However, there have been several court cases that have challenged HMRC on this point, where the judge found in favour of the taxpayer on the grounds that HMRC’s denial of the loss claim was not in the spirit of the legislation.
There is no time limit on making a loss relief claim of this nature and the loss may be backdated by up to two years from the date the claim, provided that the loan was irrecoverable in that earlier period. Following a successful claim, the loss will then be available to offset against any capital gains arising within the same period or a later more prosperous time.
If you have been affected by matters discussed above and would like assistance in assessing your claim, please get in touch.
