Business owners often lend money to their own business (e.g., to support it through cashflow difficulties). Unfortunately, the business may subsequently be unable to repay the individual’s loan, such that the debt becomes irrecoverable. However, loss relief may be available in this context. This article focusses on the capital gains tax (CGT) relief for loans to traders.
That’s a Relief
Broadly, an individual who makes a loan to a trade (e.g., their own or a family member’s) may be able to claim a loss for CGT purposes (under TCGA 1992, s 253) if the loan has become irrecoverable at the time of the claim, and certain conditions are satisfied. The conditions include that the money was used wholly for the purposes of the borrower’s trade (excluding money lending), profession or vocation (or to set it up). The other conditions (not all mentioned here) include that the loan must not have become irrecoverable due to the terms of the loan, or any arrangements of which the loan forms part, or any act or omission by the lender.
Throwing Good Money After Bad?
If HM Revenue and Customs (HMRC) checks the loss relief claim, a potentially contentious area is whether the loan was already irrecoverable when it was made (see HMRC’s Capital Gains Manual at CG65951). This is because no relief will be due if there was no reasonable prospect that the loan would be repaid when it was made. However, each case will turn on its circumstances.
For example, in Tax Insider last year (September 2024), I reported on a successful appeal for the taxpayer in Bunting v HMRC [2024] UKFTT 275 (TC). In that case, the taxpayer set up a trading company (RSL) in July 2004. The business activities were funded by the taxpayer, who personally loaned £3,452,771 to the company. However, by 2012 the business was becoming unsustainable. In January 2013, the taxpayer and RSL entered into an agreement to capitalise £2,200,000 of the loan (i.e., RSL issued 2,200,000 ordinary £1 shares in consideration for the taxpayer releasing and discharging RSL from £2,200,000 of the loan). However, on 31 January 2013, RSL (and so the shares) had no value. The taxpayer claimed capital losses, which HMRC refused. However, the First-tier Tribunal (FTT) held that there was an outstanding amount which had become irrecoverable, and that the loan had not been ‘paid’ when it was released in satisfaction of the issue of the consideration shares.
The Saga Continues…
Unfortunately for the taxpayer, HMRC is not known for being a good loser! HMRC successfully appealed against the FTT’s decision (HMRC v Bunting [2025] UKUT 96 (TCC)). The Upper Tribunal (UT) found that a qualifying loan cannot be ‘outstanding’ for the purposes of TCGA 1992, s 253 following its voluntary release by the lender in consideration for shares. The effect of releasing £2,200,000 of the loan was to extinguish that part of it, and the UT found that it was therefore no longer ‘outstanding’ when the claim for relief was made. Furthermore, the FTT was wrong to focus on the question of whether the loan had been ‘paid’ rather than considering whether it remained ‘outstanding’. The UT reinstated HMRC’s refusal of the taxpayer’s capital loss relief claim.
Practical Tip
Establishing whether the facts and circumstances meet all the conditions for relief can be a difficult exercise. Expert professional advice is recommended.