The how, when and by whom relief can be claimed on losses.
Who is eligible?
Relief is available under section 253 of TCGA 1992 where a loan:
- is made to a UK-resident borrower (if the loan is made before 24 January 2019) or to non-UK resident borrowers since that date
- is wholly for the purposes of a trade or to set up a trade, as long as they start trading
- has not been assigned by the lender any right to recover that amount
- is between the lender and the borrower who are not spouses or civil partners or companies in the same group when the loan was made or at any subsequent time CG65951
- becomes irrecoverable.
A trade includes ‘a profession or vocation’, but it does not include money lending. For example, if a director lends the money to the company for the purchase of an investment property, this loan will be categorised as a non-qualifying loan for claim under s253 of TCGA 1992 and relief may not be available. The general rule of capital losses is that they can only be offset against capital gains.
Who can claim?
Capital loss relief can only be claimed by the taxpayer who made the loan. It was decided in HMRC v Execs of Mr Jeffrey Leadley [2017] UKUT 0111 by the Upper Tribunal (UT) where UT overturned the original decision of the First-Tier Tribunal (FTT) and established that executors of the deceased taxpayer were not entitled to make a claim under section 253 if the loan was already irrecoverable before the death of the lender.
Is your loan actually irrecoverable?
Relief is only due if the loan has become irrecoverable. HMRC looks closely at this type of relationship to ensure it meets the criteria for the relief. To satisfy the criteria, the claimant must be able to demonstrate:
- that the borrower cannot repay the loan at the date the claim is made
- that there was no reasonable prospect of the loan ever being repaid. If the borrower continues to trade this test is unlikely to be satisfied
- that there was no indication at the time of lending the money that this would not be recovered
- that the purpose of the arrangement involving the loan was not to secure tax relief.
When can you claim relief?
The relief is given by treating the amount outstanding as an allowable loss. Normally, you cannot claim that only part of the amount outstanding on a loan has become irrecoverable. You can make a claim if:
- the borrower has been placed in bankruptcy, receivership or liquidation
- the receiver or liquidator has announced an anticipated dividend in respect of unsecured debts and has indicated that no further dividends are likely
- the amount of loan has been written off or released by waiver.
Relief may therefore be claimed against capital gains of the year of claim or carried-forward to the first available gains of subsequent tax years.
After the loan has become irrecoverable, the loss needs to be claimed within four years of the end of the tax year in which the loss crystallises. The loss will arise:
- at the time you make the claim or, if you want
- for capital gains tax purposes, the earlier time falls not more than two years before the beginning of the year of assessment in which the claim is made; or
- for corporation tax purposes, the earlier time falls on or after the first day of the earliest accounting period ending not more than two years before the time of the claim.
On this basis, your client could make a claim for the current tax year (2019/20), but also for either of the two preceding tax years 2017/18 or 2018/19 if this were more beneficial, providing that it can be shown that the loan was irrecoverable in the earlier years.
Do you have to pay back if recovered in future?
If you recover any amount for which you have claimed relief the amount you receive is treated as a chargeable gain. The chargeable gain arises in the tax year the payment is received and at the time of recovery.
Full HMRC manual guidance can be accessed here
This article has been shared from ACCA In Practice, to whom copyright belongs. Whitefield Tax are an ACCA Member Firm