HMRC Loss Relief
HMRC are always opposing any applications you make for any sort of loss relief during their investigating procedures.
One of their favourites of course is opposition to loans that have been lent that effectively turn out to be bad debts.
So, when lending money you should ensure that you know exactly what you are doing.
The other way of investing in companies is buying shares which, if they become nil value, you can usually claim share loss relief against income.
But the position is slightly different if you lend money, and there are a number of ways you can lend it say to a company just starting or struggling for money or cash flow problems and need an injection of cash for a short period of time.
It could be that debtors are taking from 30 days up to 90 days to pay their bills leaving the company short of cash so instead of investing in shares, because you may not be able to do so, there might be a sole trader or partnership, the other way of actually doing it is to lend them the cash – given that a loan could be more attractive from a commercial point of view.
If the company goes under and you are a creditor you are in a better position than shareholders in the event of administration. For instance, a loan can be repaid over a period of time when, in fact, there is little or no market for trading of the company’s shares and of course you can charge interest on the outstanding loan.
Quite attractive in the short term and possibly the long term – especially now there are lots of companies inviting investors to lend money to their clients, it’s becoming a huge business. But then we face the question what happens if I lose the money, what relief is there I can claim and can I claim tax relief on that money/loss?
Well there is some recourse but the relief is not as valuable as share loss relief as the lost amount can only be offset against capital gains – not income. That means the rate of relief is 28%, which is the highest rate of CGT and is referred to in the Taxation of Chargeable Gains Act 1992.
As usual there are qualifying conditions to satisfy, so not all bad loans will attract relief.
So, you need to take into account the following conditions:
- The borrower must be a UK resident and cannot be your spouse or civil partner – even if they weren’t at the time the loan was made.
- The money raised must be used solely for the purposes of a trade and have subsequently become irrecoverable. This sometimes is very difficult to show. For instance, HMRC will ask you for proof, even to the point of going to Court to try and recover the money involving more costs of course. You need to be able to demonstrate there is no realistic prospect of getting the loan repaid in the future. You may even have to go as far as issuing a statutory demand on the company or the borrower (if they are an individual or a partner), all of which costs money which may also make the outstanding loan even more expensive to recover.
HMRC have said on occasions they will only accept it was a bad loan if a petition had been issued against the individuals to try and recover the money when clearly, that is expensive and it is necessary to put a large deposit to cover the administrator’s/liquidator’s costs.
So, again it all depends on the size of the loan.
So, you must take care when lending money – especially to friends. I have found that more friendships fall apart over money lent than one can imagine. So, do be careful
Also, it is necessary to show that when you lent the money the loan was not recoverable in an event. In other words, there are cases where somebody has lent the money knowing jolly well that they are not going to recover it. In those circumstances, HMRC will reject any claim for relief.
The relief from the claim is on your self-assessment tax return for the year the loan becomes irrecoverable. That will give rise to a capital loss which is then deducted from gains in the normal way. Don’t throw away money if gains are covered by the annual exemption. For instance, the relief would be applied to the current year gains before deducting it so to avoid wasting relief you should look at delaying making a claim until the next tax year.
Also of course, for any loans that are later recovered then there needs to be an adjustment for your returns on your tax form.
So, there you are. HMRC do, as usual, look upon us all as the sinners, not to be trusted in making the returns for some reason or another. But there we are, we have to bear that cross and ensure we can back up everything we say with supporting documents.