C3.703A Irrecoverable loans to traders—whether the loan is irrecoverable
Where a qualifying loan is made and used for the purposes of a trade carried on by the borrower (ie the trader) and it subsequently becomes clear that all or part of the sum lent cannot be recovered from the borrower, the lender may in certain circumstances claim relief for an allowable loss for capital gains tax purposes or corporation tax purposes1. Similarly a claim may be made for an allowable loss that arises on a payment made by a guarantor on a loan which has become irrecoverable from the borrower, see C3.703B2.
For a full discussion of the conditions that must be met for the loan to be qualifying, see C3.703.
The commentary below discusses whether the loan has become irrecoverable. For the details of the allowable loss claim and the amount of the loss, see C3.704. For commentary on the position where the taxpayer later recovers any amount in relation to which the allowable loss has been claimed, see C3.705.
Whether the loan is irrecoverable
Whether or not the loan has become irrecoverable can be contentious as it rests on whether there is any realistic hope of being repaid, which will be fact specific, and possibly subjective. There have been a number of tax cases heard in the past as to whether a particular loan has become irrecoverable.
The guidance in CG65950 instructs HMRC to consider the funds potentially available to the trader, not just the funds currently available. This means that HMRC