Relief for Bad Loans

As the country faces economic uncertainty, which may mean some businesses look to restructure or refinance their debts, we thought it would be helpful to outline the rules around when individuals and trustees can get tax relief for debts that may be, or become, irrecoverable. We will not touch on lending between companies in this Bite, which was the subject of a recent Tax Bite and is available on our blog here:

Normally and in the hands of the original lender, simple debts (i.e. loans made pursuant to a loan agreement) are not chargeable assets for capital gains purposes, so any losses on these assets (e.g. on non-repayment) are not allowable either. However, there is a relief which allows such losses to be set against any capital gains for individuals and trustees in relation to irrecoverable debts made to trading business in certain circumstances. There is a similar relief available for guarantors who make payments in respect of these types of loans too, but we will not cover that here.

The loans that qualify for this relief must have been made to someone (sole trade, partnership or corporate) carrying out a trade, which includes a profession and vocation, and must have been used wholly for the purposes of that trade. Loans to property or investment businesses would not qualify.

The loan must have become irrecoverable since it was made, which means both that it must have been recoverable at some point and that it has subsequently become irrecoverable. If a loan is made at a time when there was no reasonable prospect of recovery in future, then relief may not be possible under these rules, but each case would need to be considered on its facts.

The relief is available if a loan has become irrecoverable in part only (i.e. on the irrecoverable part), so it is not the case that the whole of a loan must be irrecoverable, but the loan must remain with the original lender until after the claim, so once a debt has been assigned relief is no longer possible under these rules.

Relief can be claimed for the principal amount of any loan that has become irrecoverable (i.e. not interest) and would create a capital loss in the year of claim, which would be set against gains arising in that year or, if the loss exceeds the gains in that year, carried forward and set against future gains. Any losses cannot be carried back but it is possible to make historic claims too, provided the claim is made within two years of end of the tax year in question and the debt was irrecoverable in the tax year in respect of which relief is claimed. So in theory if an investor is facing a loss on a loan now, they ought to look back (as far as the 2018/19 tax year) to see when the loan first became irrecoverable and assess their capital gains position over the period to see how they could best make effect of any relief claim.

These rules are not needed if the loan is what is termed a non-qualifying corporate bond (non-QCB) – which is a loan the terms of which have certain characteristics. Non-QCBs are assets for capital gains tax purposes which means that any losses can be set against gains anyway. A full consideration of what is a non-QCB is not considered here but as a rule of thumb a UK resident individual will usually want any loan to be non-QCBs and should take advice as to how that can be achieved.

If you or a client is facing the prospect of making a loss on a loan, then the circumstances of the debt should be reviewed to see if tax relief may be possible either on general principles or under loans to traders relief rules summarised in this note. Also, and in particular if as part of a restructuring or disposal investors are facing the prospect of making a loss when assigning a debt, then they should consider these rules to see if a claim could be made – before any assignment – to see if some benefit could be derived from any irrecoverable part of a debt.

Posted on 31/05/2020 in Tax News, Debt Restructuring, Tax and Covid-19


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