A capital loss can arise on a loan to a trader that has become irrecoverable. Relief is also available for certain payments made under guarantee in respect of a qualifying loan. Both types of relief are subject to various conditions.
Claiming the relief
The legislation giving relief for loans to traders is in TCGA 1992, s 253. In the case of a loan guarantee, the relief conditions are set out in s 253(4). The relief must be claimed. The main conditions for relief in respect of guarantee payments are broadly as follows:
(a) The loan (and/or interest) must have become irrecoverable from the borrower at the time of the claim.
(b) The claimant must have made a payment under the guarantee (i.e. to the lender or a co-guarantor) in respect of the irrecoverable amount.
(c) The claimant must not have assigned any right to recover the amount due to him in respect of the guarantee payment.
(e) The lender and borrower were not connected as spouses, civil partners or group companies when the loan was made or subsequently. In addition, the claimant and borrower must not have been connected as spouses or civil partners, and the claimant and lender must not have been group companies, when the loan was made or subsequently.
The guarantee must have been given after 11 April 1978 (s 253(15)). It does not matter when the loan to which the guarantee relates was made.
The guarantee must relate to a loan of money, which was used wholly for the purposes of the borrower's trade (or a profession or vocation; see CG65991), which does not consist of or include the lending of money. Alternatively, the loan must have been used for the purposes of setting up a trade that was subsequently carried on. In either case, the borrower must be UK resident, and the debt must not be a 'debt on a security' within TCGA 1992, s 132 (s 253(1)).
Claims in respect of guarantee payments must be made no later than four years after the end of the tax year in which the guarantee payment was made (for capital gains tax purposes), or within four years after the end of the accounting period in which the payment was made (for corporation tax purposes) (s 253(4A)).
Payment made under the guarantee?
HMRC may seek to check claims under s 253(4) to ensure that the relief conditions are satisfied. For example, HMRC may want to check that the loan was genuinely irrecoverable before the lender required payment under the guarantee (CG66000). In addition, it may be necessary for the claimant to demonstrate that the payment was actually paid under the guarantee. For example, HMRC's guidance states: "...where a payment has been made without the issue of a demand you will need to consider whether the payment was made under the guarantee" (CG66011).
In practice, unless the terms of a written guarantee required a demand to be issued, it may be difficult to demonstrate that a payment was made under guarantee.
In Goldsmith v Revenue & Customs  UKFTT 521 (TC), the taxpayer was a director of a property trading company. He claimed (among other things) loss relief under s 253 on the basis of payments he made under a guarantee given to a bank which had lent money to the company. HMRC refused to allow the claim, contending that there was no evidence that that repayment was demanded by the bank under the guarantee.
The company had used the loans in question to acquire two flats. One flat was subsequently sold, and the second was rented out. The loan interest payments exceeded the rents. The taxpayer made up the shortfall, and his director's loan account was credited accordingly. The second flat was standing at a loss, after taking into account the outstanding loan. The company was later dissolved.
HMRC argued that relief under s 253(4) could not apply because the loan was irrecoverable from the outset, i.e. it was not a loan which had 'become' irrecoverable. However, the tribunal dismissed this argument on the particular facts of the case. HMRC also argued that payments were not made "under the guarantee" as there was no evidence the taxpayer was called upon by the lender to make payments as guarantor. The tribunal considered that the lack of evidence of a demand under the guarantee was not necessarily conclusive, or a solid foundation for refusing a s 253(4) claim. The tribunal commented that there was insufficient evidence of the terms and conditions of the guarantee to be able to consider whether the guarantee required a demand to be given. The tribunal did not attach much weight to the lack of evidence of demands for payment under the guarantee.
However, the tribunal then considered whether the mere fact that payments were made when the taxpayer was a guarantor was enough to establish that those payments were made under the guarantee. The tribunal considered that whether a payment was "made under the guarantee" would need to be determined according to the particular circumstances of the payment in question. In the present case, it was for the taxpayer to establish that the payments were made under the guarantee, but the tribunal held that there was inadequate evidence to reach that conclusion.
Fortunately for the taxpayer, the tribunal went on to consider the availability of relief under s 253(3) in respect of the director's loan account with the company. The tribunal found that the loan was used "wholly for the purposes of a trade carried on by him" within s 253(1), as the money paid by the taxpayer was wholly used to pay the interest on a loan which was itself for the purposes of the company's trade. The tribunal therefore held that the taxpayer should be entitled to claim relief under s 253(3), as opposed to the guarantee provisions under s 253(4).
The Goldsmith case illustrates the importance of being able to demonstrate that payments made by the guarantor were actually made under a guarantee, in terms of securing relief for the payments under s 253(4).
HMRC guidance states (at CG66012): "The first question to consider is whether the terms of the written guarantee required a demand to be issued. If they did not, then unless there are unusual circumstances pointing to a different conclusion, there should be no difficulty in accepting that the payment was under the guarantee."
However, if the terms of the written guarantee required the issue of a demand, but no demand was actually issued, it may be more difficult to prove that the payment was made under a guarantee. The type of proof that HMRC might seek includes:
- "evidence that the lender had discussed with the guarantor proposals to discharge the original borrower's liabilities
- details of any payments made where the money paid over either went directly to the lender or, although it went to the original borrower, it was not at that person's disposal since that person was merely acting as a conduit through which the money passed on its way to the bank
- evidence on behalf of the parties that the payment was to be considered as satisfaction or partial satisfaction of the guarantor's liability (for example, correspondence between the lender and the guarantor, or board meeting minutes which show the payment was being made as a result of liabilities under the guarantee)."
As noted above, if insufficient evidence exists to support a claim for the guarantee payment under s 253(4), HMRC may consider a claim under s 253(3) instead as a loan to a trader (CG66013), as was the tribunal's approach in the Goldsmith case. The tribunal noted the absence of any letters of demand from the lender, and there was no evidence that the taxpayer was called upon to make payments under the terms of the guarantee. The claim under s 253(4) required further evidence, but the tribunal went on to consider a claim under s 253(3) instead.
Mark McLaughlin CTA (Fellow) ATT TEP