Ken Moody explores capital gains tax relief for loans to traders and points out that there may be forgotten claims out there waiting to be made.
Capital gains tax (CGT) relief for loans to traders (TCGA 1992, s 253) may be used to establish a capital loss; however, unless there is an immediate or anticipated practical use for the relief there is, perhaps, a danger of a claim being overlooked.
Hurdles to jump
The ‘trader’ may be incorporated or unincorporated; but the legislation requires that the money lent must be used by the borrower ‘wholly for the purposes of a trade carried on by him’. If some of the money is used for other purposes, that part of the loan will not qualify for relief.
Relief is extended to guarantees given over a loan to a trader where the creditor calls in the guarantee.
The loan must have ‘become’ irrecoverable and as HMRC guidance in the Capital Gains manual points out (at CG65951): ‘if the business was in such difficulties at the time the money was loaned… it should be regarded as irrecoverable from the outset.’ In that case, no relief is due under TCGA 1992, s 253 as the debt did not become irrecoverable.
HMRC considers that a loan has become irrecoverable where there is no reasonable prospect of recovery having regard to the funds currently and potentially available, but while the trader continues to trade the initial presumption should be that the loan remains recoverable (CG65950).
The guidance does acknowledge, however, that ‘There may, exceptionally, be no reasonable prospect of recovery even though the borrower continues to trade’ depending upon the precise circumstances’. This seems, perhaps, a rather niggardly approach given that TCGA 1992, s 253(5)-(8) prescribe that if the money lent or paid under a guarantee is subsequently recovered the amount recovered is treated as a chargeable gain, thereby recognising that whether a loan is irrecoverable may not be clear cut at the time the claim is made.
Claiming relief
A claim for relief under TCGA 1992, s 253 must be made and the loss arises at the time the claim is made subject to section 253(3A), which allows the claim to specify an earlier date within the previous last two tax years (or company accounting periods) when the debt was also irrecoverable.
Since the legislation does not specify any time limit for making the claim there is no technical reason why a claim may not be made even many years after a debt has become irrecoverable. The only debar to relief is where a loan has become irrecoverable under the terms of the loan or as a result of an ‘act or omission’ of the lender or guarantor (TCGA 1992, s253(12)). However, in Crosby v Broadhurst [2004] SSCD 348 the fact that a loan had been waived (as a condition of a company sale) before the claim was made did not prevent a claim for relief.
The main obstacle to making a claim under TCGA 1992, s 253 many years after a loan has become irrecoverable may be evidential; of making the loan or giving the guarantee, the use of the money by the trader and of the loan having become recoverable.
Practical tip
It is sometimes suggested that a loan to a company could be converted to share capital in order that share loss relief (for income tax) may be claimed instead under ITA 2007, s 131. This is a very bad idea if the debt is impaired because the CGT base cost of the shares would reflect the market value of the debt and the result may be that no relief would be due under ITA 2007, s 131 even if the conditions were otherwise met (which is unlikely) and the conversion would normally preclude relief under TCGA 1992, s 253 so would be, as one might say, a ‘double whammy’.
