Irrecoverable loan to trader

By Tolley

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

  • Irrecoverable loan to trader
  • Relief for a lender
  • Relief for a guarantor of a debt
  • Later recovery of loan / payment made under guarantee
  • Avoiding a trap

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.

TCGA 1992, s 21(1)(a) as read with TCGA 1992, s 251 and TCGA 1992, s 132

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 2018/19 Chapter 44.12 (subscription sensitive).

Note that in July 2018, the European Commission formally gave notice  to the UK Government that the irrecoverable loan to trader rules breach the EU principle of free movement of capital. This is 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 how 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 EU legal challenge ― losses on shares set against income news item.

Relief for a lender

For the loan to qualify for relief:

    More on Capital gains summary: