In HMRC v Bunting [2025] UKUT 00096 (TCC), the Upper Tribunal (UT) considered when a loan to a trading business can be regarded as ‘outstanding’ and ‘irrecoverable’, meaning that the lender can claim an allowable capital loss.
The Facts
Timothy Bunting (TB) made a series of loans, totalling £3.45m, to a trading company (Rectory Sports Limited) in which his wife was the sole shareholder and director. The company traded in sports memorabilia and books. By 2012, it was clear that the business was likely to prove unsustainable.
On 31 January 2013, TB and the company agreed to capitalise £2.2m of the loan, so 2.2 million ordinary shares of £1 each were issued in discharge of part of the loan. This was with a view to TB making a claim to set a capital loss on the shares against income (ITA 2007, s 131). However, the company and shares had no value at the time of issue, making such a claim invalid.
On 18 March 2013, the remaining loan balance was discharged by the transfer of assets to TB, before the company entered liquidation the following month.
TB claimed a capital loss under TCGA 1992, s 253 (loans to traders) in respect of the £2.2m element of the loan for which worthless shares had been issued. HMRC argued that the capitalisation of £2.2m of the loan satisfied that part of the debt, so there was no amount of loan outstanding which had become irrecoverable.
The Legislation
TCGA 1992, s 53(3) provides that an allowable loss will arise for CGT purposes where ‘a person who has made a qualifying loan makes a claim and at that time…any outstanding amount of the principal of the loan has become irrecoverable’.
A ‘qualifying loan’ is (inter alia) a loan where the money lent is used by the borrower wholly for the purposes of a trade carried on by them. Money used by the borrower for setting up a trade that is subsequently carried on by them is treated as used for the purposes of that trade.
Tribunal Decisions
The First-tier Tribunal (FTT) allowed TB’s appeal, deciding that when the section 253 claim was made on 29 February 2016, there was an ‘outstanding amount which had become irrecoverable’ in respect of the £2.2m of loan that had been capitalised three years earlier on 31 January 2013. By receiving worthless shares, TB had not been ‘paid’ £2.2m; there had been no satisfaction of the debt for valuable consideration in money or money’s worth, so the debt remained unpaid and hence was outstanding at the date the section 253 claim was made.
HMRC appealed to the UT, which held that the FTT had erred by focusing on whether the loan had been ‘paid’; what mattered was whether the loan was ‘outstanding’. In section 253(3), the words ‘outstanding’ and ‘irrecoverable’ must be given their ordinary meaning. The loan had been replaced with shares, which were fully paid up by
the voluntary release of the £2.2m loan. The loan was therefore no longer outstanding, as evidenced by the fact that:
- There was no ongoing obligation to pay that amount, and
- TB had no entitlement to recover it.
The UT decision is in line with HMRC’s policy in this area (see HMRC’s Capital Gains Manual at CG65934) and also aligns with how most practitioners would view the law, so it should come as no great surprise.
Practical Tip
If a loan to a trading business has become irrecoverable, it is disadvantageous to exchange the loan for worthless shares. The latter will not attract tax relief, but the irrecoverable loan may save some CGT.