If you're thinking about claiming tax relief on a loan write-off because of a failed business investment, understanding the strict rules that govern such relief is important.
Overview
Whilst you can obtain capital gains tax relief when shares become worthless, what's the tax treatment when a loan to a failed business is irrecoverable?
Firstly, in order to qualify for the relief, the loan must be wholly used for starting or running a trade. Consequently, if only a proportion of the loan was used for this purpose then relief is restricted.
What is considered a trade?
A trade includes professions and vocation, though it excludes money lending. Moreover, this definition is key to your claim. A loan to a commercially run furnished letting holiday business qualifies though only until 5 April 2025, when the tax treatment changed.
Additionally a loan to a trade can include a loan to your own company. Although, it may be necessary to analyse your loan to determine those amounts used for non-qualifying purposes.
Furthermore, where the loan has been transferred within a group of companies, relief is still available. Equally importantly, it can also be available where a loan has been used in the transferee company's non-UK trade. Specifically, where that company is a non-UK resident company.
Circumstances where no tax relief is due
There are a number of situations where claiming tax relief on a loan write-off will never be possible:
Additionally, if the loan was irrecoverable when made or purely an arrangement to secure tax relief this will not qualify..
Claiming the relief
The loan must have become irrecoverable. Additionally, this includes a release by a waiver. Furthermore, where the borrower continues trading, it will be hard to prove there is no reasonable prospect of recovering the loan.
Alternatively, if you are claiming as a guarantor, the agreement must stipulate, you're required to repay a loan made to a trader who has defaulted.
Time limits for claims
Loans
The capital loss arises when you make a claim for the irrecoverable loan. Equally importantly, there is no time limit in which to make the claim, Therefore, if a loan has previously become irrecoverable, you can specify for up to two years previously.
Example
If you make a claim in 2025-26 you may ask to claim relief in 2023-24 or 2024-25. To do this you may need to amend the previous year's tax return.
Payments under guarantee
Where a claim for relief is made for a payment made under a guarantee, the claim must be made within four years of the end of the tax year in which the payment under the guarantee was made
Example
A payment under guarantee was made in the 2023/24 tax year. Therefore a claim must be made by the end of the 2027/28 tax year.
Problem areas
There are a number of tax cases which indicate the pitfalls to avoid when making a claim. Some examples are below, however this list is by no means exhaustive.
In this case, relief was denied because there was no substantive evidence that a loan ever existed. Furthermore, there was also a question as to which company the money had been 'loaned' and whether there was any trading activity.
A claim for relief met some resistance from HMRC who were sceptical that a company was carrying out a trade. This underlines the importance of maintaining detailed records in support of any claim.
Converting a loan into worthless shares also won’t help. Because HMRC regard this as satisfaction of the loan, not a write-off. Once converted, the loan is no longer “outstanding.”
Summary
Claiming tax relief on a loan write-off can reduce your CGT bill—but only if every condition is met.
We recommend you keep full records, act commercially, and seek advice if unsure. The rules are strict, and HMRC does challenge claims.
For more useful information, check out our Ebooks here
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.