Relief available on losses on loans by traders

Relief is available where a loan:

• is made to a UK-resident borrower
• is wholly for the purposes of a trade or to set up a trade, as long as they start trading
• has not been assigned by the lender any right to recover that amount
• is between the lender and the borrower who are not spouses or civil partners or companies in the same group when the loan was made or at any subsequent time CG65951
• becomes irrecoverable.

A trade includes ‘a profession or vocation’, but it does not include money lending. For example if a director lends the money to the company for the purchase of an investment property, this loan will be categorised as a non-qualifying loan for claim under s253 of TCGA 1992 and relief may not be available. The general rule of capital losses is that they can only be offset against capital gains.

Capital loss relief can only be claimed by the taxpayer who made the loan. It was decided in HMRC v Execs of Mr Jeffrey Leadley [2017] UKUT 0111  by the Upper Tribunal (UT). Where UT overturned the original decision of the First-Tier Tribunal (FTT) and established that executors of the deceased taxpayer were not entitled to make a claim under section 253 if the loan was already irrecoverable before the death of the lender.

Relief is only due if the loan has become irrecoverable. HMRC looks closely at this type of relationship to ensure it meets the criteria for the relief. To satisfy the criteria, the claimant must be able to demonstrate:

• that the borrower cannot repay the loan at the date the claim is made
• that there was no reasonable prospect of the loan ever being repaid. If the borrower continues to trade this test is unlikely to be satisfied
• that there was no indication at the time of lending the money that this would not be recovered
• that the purpose of the arrangement involving the loan was not to secure tax relief.

The relief is given by treating the amount outstanding as an allowable loss. Normally, you cannot claim that only part of the amount outstanding on a loan has become irrecoverable. You can make a claim if:

• the borrower has been placed in bankruptcy, receivership or liquidation
• the receiver or liquidator has announced an anticipated dividend in respect of unsecured debts and has indicated that no further dividends are likely
• the amount of loan has been written off or released by waiver.

After the loan has become irrecoverable there is no time limit in which to make the claim. The loss will arise:

• at the time you make the claim or, if you want
• at an earlier time you specify when you make your claim that falls in either of the two previous tax years, provided all the necessary conditions for relief are satisfied at the date you make the claim and at the earlier time.

If you recover any amount for which you have claimed relief the amount you receive is treated as a chargeable gain. The chargeable gain arises in the tax year the payment is received and at the time of recovery.

Access the full HMRC manual guidance for details.