Tax help when loans and investments go bad

Tax Consultant at Nottingham-based accountants and tax advisors Page Kirk, discusses the different types of relief available from HMRC if things go wrong financially

COVID-19 has presented some serious challenges for businesses. The Government has provided support in the form of the furlough scheme and business loans and grants, but where businesses have not been able to generate sufficient income, these measures may not be enough.

If companies end up in a position where they need to permanently scale back the size or nature of their operations – or worse, cease trading altogether – many individuals may find themselves in a difficult situation. Loans they have made to businesses will never be repaid.

Shares in companies in which they have invested will result in a loss.

It may seem like small comfort, but the tax system can provide a route to recouping some of the losses made in these instances and taxpayers who find themselves in these positions should make sure they take. advantage of all the reliefs they are entitled to.

The first relief to address is related to loans that have become irrecoverable.

This could be the case where an individual has lent money to their business, the business of a family member or an unconnected business.

The definition of a loan for these purposes can also include a credit balance on a director’s loan account or an agreement to extend a period of credit to a business beyond what is customary in the relevant trade.

Provided the borrower has used the loan wholly for the purposes of their trade and the lender has not already received tax relief for the irrecoverable loan as a trading expense, the irrecoverable loan can be claimed by the lender as an allowable loss for capital gains tax purposes.

Once claimed, the loss can be set against the individual’s capital gains, which could save the taxpayer capital gains tax at a rate of between 10% and 28%, depending on the asset involved and the individual’s level of income.

This will allow them to get back at least a small portion of the loss suffered on the irrecoverable loan.

The second relief is where an individual has invested in shares in a company that will result in a loss for the taxpayer.

This could be because they sell their shares for less than they paid for them or, alternatively, because the company has been wound up and the individual’s share of a distribution in the winding-up is less than the amount they originally paid for their shares.

A loss on shares is generally a capital loss which can be used to obtain tax relief against a taxpayer’s capital gains.

However, for certain shares, the loss can instead be offset against the taxpayer’s income.

There are numerous conditions to the relief, but broadly, to qualify, the shares must be in unquoted trading companies.

This will apply to the vast majority of owner-managed businesses. EIS investments also qualify.

By offsetting the loss against a taxpayer’s income, tax relief can be obtained at rates of between 20% and 45% – offering a clear advantage over using the loss against capital gains and enabling a taxpayer to reclaim, in some instances, nearly half of their money lost on their investment.

The amount of relief that can be claimed is limited to the greater of £50,000 or 25% of an individual’s income.

Both of these reliefs come with conditions attached that go beyond the scope of this article, so if you find yourself in either of these positions, make sure you take professional advice to maximise the tax relief you can obtain. Finally, a warning.

Many people may see the advantageous position that offsetting a loss on shares against income brings over a capital loss for an irrecoverable loan.

This could tempt taxpayers to convert their loans to shares and then subsequently claim a capital loss on their shares.

Don’t do it! The legislation is structured to treat the base cost of the shares as the market value of the loan, ie nothing. You would therefore have no loss on a subsequent disposal of the shares and both reliefs would be unavailable.

If you would like to discuss anything in this article, please contact us on 0115 955 5500 or e-mail: