C3.703B Irrecoverable loans to traders—payment made under guarantee
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 borrower2.
It is common for an individual to lend money to their own trading company or act as guarantor to a loan made by a bank to their trading company. Provided the conditions are met, the individual can claim an allowable loss should the loan become irrecoverable or the bank calls in the guarantee.
For details of the conditions that must be met for the loan to be qualifying, see C3.703. For a discussion on whether the loan has become irrecoverable, see C3.703A
The commentary below discusses the issues to be considered where payments are made under a guarantee. For the details of the allowable loss claim for both lenders and guarantors and the amount of the loss, see C3.704.
The need for a guarantee
A guarantor is someone that contractually agrees to pay back a loan if the borrower defaults.
The lender will normally require a guarantor where a loan is unsecured, meaning that the borrower