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Markel Tax

22 Jun 2020

Loans to private companies and what relief is available when it all goes wrong

Q – My client has traded via a company for many years but has struggled in recent years and the current Covid-19 crisis has meant he faces having to cease trading and close down the company. He has lent a considerable amount of money to the company over the years and has asked whether any tax relief can be claimed as it is unlikely any of the loans will be repaid. My understanding is that converting the loans to shares may give my client the opportunity to claim a loss against income which would help his current cashflow issues and I would like more information on this possible solution.

A – It is possible in certain circumstances for your client to make a claim for an allowable capital loss under TCGA 1992 s 253, where the loans have become irrecoverable. The capital loss can be set against capital gains in the normal way. There are some conditions which have to me for the loans to qualify for relief and the main ones are that your client must:

  • Be UK resident;

  • Have used the money wholly for the purposes of the trade carried on by the company;

  • Must not have assigned the right to recover the loans.

The loans must be simple debts and not debts on security but the crucial point is that the loans must have become irrecoverable to qualify for relief. Your client will need to demonstrate that there was a realistic chance of recovering the money when the loan was made. You mentioned that the loans were made over a number of years so you will need to review with your client when the loans were made and the prospect, at that point, of recoverability. HMRC review these claims carefully and may enquire as to why the loan has now become irrecoverable. If the company continues to trade and/or has other assets on the balance sheet HMRC will resist the claim on the basis it may be possible to recover the loans in the future.

It is correct that claiming a negligible value claim in respect of shares in an unquoted trading company can generate a loss to set against income under ITA 2007 s 131, so I can see why you are interested in exploring a conversion of your client’s loans into equity. Unfortunately, in your client’s case there is a trap and your client will risk ending up with no relief at all if the debt is converted.

The shares acquired from capitalising the loans would be acquired otherwise than by way of a bargain at arm’s length under TCGA 1992 s 17, the base cost of the shares would be market value which in your client’s case could be nil, assuming the loans are worthless. Furthermore, the negligible value claims work similarly to claims under the loan to trader principles in that the shares must have become of negligible value. If they were already worthless at the point of issue the claim would not be valid.

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