Irrecoverable loan to trader

Produced by Tolley

The following Personal Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Irrecoverable loan to trader
  • Relief for a lender
  • Conditions
  • Claiming relief
  • When is a loan irrecoverable?
  • Relief for a guarantor of a debt
  • Conditions
  • Claiming for relief
  • Later recovery of loan / payment made under guarantee
  • Avoiding a trap

Irrecoverable loan to trader

A debt is not normally a chargeable asset for capital gains purposes unless it is a ‘debt on a security’. Broadly, this is defined as marketable loan stock other than gilts and qualifying corporate bonds (which are exempt assets). So, usually, any loss created by the default on a debt is not a loss for capital gains purposes.

However, an allowable capital loss may arise where loans made to traders become irrecoverable or a payment is made under guarantee on behalf of a trader. Once the loss is claimed, it can be utilised in the same way as any other allowable capital loss. See the Use of capital losses guidance note.

Any later recovery of the loan / guarantee payment is treated as a capital gain equal to so much of the loss already allowed that is recovered.

For further reading, see Tolley’s Capital Gains Tax 2020/21 Chapter 44.12.

Note that FA 2020 includes changes to the borrower residence condition for relief under the irrecoverable loan to trader rules that apply with effect from 24 January 2019. This is response to the reasoned opinion issued by the European Commission on the same date that stated that the existing irrecoverable loan to trader rules breach the EU principle of free movement of capital. The existing condition breaches EU law because the relief is only available where the borrower is UK resident. Therefore, it may be possible for individuals with irrecoverable loans to non-UK traders or those who have made a payment under a guarantee on behalf of a non-UK trader to claim loss relief. For a detailed discussion of the matter and the options open to the taxpayer with respect to both losses arising in the current tax year and in previous tax years, see the FA 2020 ― can HMRC limit claims for historic share loss relief and loans to traders? [updated] news item.

Relief for a lender


For the loan to qualify for relief:

  1. the loan must

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