The number of capital loss relief claims made in respect of irrecoverable loans to businesses and guarantee payments has seemingly increased significantly since the commencement of the financial crash in 2007/08.
Does it qualify?
The conditions for claiming capital loss relief on loans to traders are relatively well known. For example, the relief applies to qualifying loans (TCGA 1992, s 253(1); all references are to TCGA 1992). A ‘qualifying loan’ is broadly a loan used wholly for the borrower’s trade, profession or vocation (i.e. including setting it up). This requirement excludes money lending trades. The debt must not be a ‘debt on a security’ (as defined).
In addition, the borrower must be UK resident. Draft Finance Bill clauses published in July 2019 included an extension of relief to loans made to traders who are resident anywhere in the world, for loans made on or after 24 January 2019. However, due to political uncertainty at the time of writing it is not known if or when this amendment will become law.
Conditions and claims
Capital loss relief claims in respect of guarantee payments are generally less common and the rules for claiming relief not as familiar. This article looks at capital loss relief claims for guarantee payments made by individuals, although claims by companies are also possible if the relevant conditions are satisfied.
The relief is available if the individual who has guaranteed the repayment of a loan which is (or would but for being a ‘debt on a security’) a qualifying loan makes a claim, where certain conditions are satisfied at that time. These are broadly as follows (s 253(4)):
(a) Any outstanding loan (or interest thereon) has become irrecoverable from the borrower;
(b) The claimant has made a payment under the guarantee in respect of that amount;
(c) The claimant has not assigned any right to recover that amount as a result of making the payment; and
(d) The lender and borrower were not spouses (or civil partners) when the loan was made or subsequently and were not spouses or civil partners when the guarantee was given or subsequently (the same condition applies to group companies as well).
Where these conditions are met, an allowable loss is treated as accruing to the claimant when the payment was made. The allowable loss is the outstanding sum less any contribution paid to him by a co-guarantor in respect of the payment.
The deadline for individuals to claim relief is four years after end of the tax year in which the payment was made.
If the whole or part of the outstanding amount, or the guarantee payment, is subsequently recovered by the individual a chargeable gain is deemed to arise, equal to the allowable loss recovered (s 253(4A)-(6)).
What could possibly go wrong?
The capital loss relief conditions for guarantee payments can be difficult and contentious. This has resulted in several cases on the subject, including some recent decisions mentioned below.
1. Has trading commenced?
It will normally be straightforward to establish that a business was trading when the guarantor incurred a financial risk. But not always.
For example, in Hunt v Revenue & Customs  UKFTT 210 (TC), a company (A Ltd) was formed in May 2007 to launch an alternative to the National Lottery. In July 2007, the taxpayer subscribed for 2,200 shares in A Ltd (i.e. a 22% shareholding). He had (through his nominee corporation) instructed Credit Suisse in June 2007 to provide a bank guarantee in relation to a loan facility of £17.5 million in favour of A Ltd. In September 2009, the bank demanded repayment of the £17.5 million loan. Payment was made by Credit Suisse from the account of the taxpayer’s nominee corporation.
A Ltd was unable to secure fresh finance and withdrew its application to the Gambling Commission in November 2009 for a licence to operate the lottery. A Ltd went into administration in December 2009. HMRC refused the taxpayer’s claim (under s 253(4)) in his self-assessment return for the tax year 2009/10 for an irrecoverable loss of £17.5 million. HMRC considered that A Ltd had not commenced a trade of running or managing a lottery. However, the First-tier Tribunal considered that A Ltd had clearly established a framework or structure for the trade. The tribunal concluded that A Ltd engaged in operational activities in which it incurred a financial risk. This was sufficient for A Ltd to have commenced trading. The taxpayer’s appeal was allowed.
2. Timing of the capital loss
The tax year in which the capital loss is treated as arising in respect of the guarantee payment can be an important issue for the taxpayer. It can also be the cause of disputes between the taxpayer and HMRC.
For example, in Eccles v Revenue and Customs  UKFTT 95 (TC), the taxpayer was part of a venture involving a company (MCE) with the aim of purchasing and developing a site. MCE spent over £1.5 million developing the site in the year ended 28 February 2008 but was unable to continue with the planned development due to the property price slump in 2008. Ulster Bank had approved an overdraft facility and loan to MCE, which included a guarantee from the taxpayer and his wife of £230,000, guaranteeing MCE’s liabilities to the bank.
In April 2009, the sum of £295,700 was paid into a personal bank account of the taxpayer and his wife. In December 2010, they placed the same sum into a ‘Money Desk’ deposit account with the bank. The funds moved in and out of the Money Desk account. On 7 March 2012, the bank requested part of the funds held on deposit in full settlement of the personal guarantee liability to MCE of £230,000. The taxpayer claimed a capital loss for his share of the guarantee payment. HMRC considered that the capital loss did not arise until the payment was made (i.e. 26 March 2012) which fell into 2011/12. The taxpayer appealed, arguing that the capital loss arose in 2009/10 when the funds were placed with the bank.
The First-tier Tribunal held that the capital loss did not arise until the taxpayer made the payment on 26 March 2012 (i.e. in 2011/12), so could not be offset against capital gains arising in an earlier year. The taxpayer’s appeal was dismissed.
3. Was there a guarantee?
The documentation relating to the payment made in respect of a loan may be crucial. What looks like a guarantee by the taxpayer may in fact be an indemnity instead, depending on the circumstances and available evidence.
For example, in Dennis v Revenue and Customs  UKFTT 735 (TC), the taxpayer entered into a joint venture with a third-party company (TAGH) in 1998. The joint venture vehicle was a company (TAGMA). The taxpayer and TAGH invested in TAGMA by way of loans and shares. The taxpayer and TAGH entered into a shareholders’ agreement in July 2001. Clause 10.3 provided:
‘To the extent that any of the Shareholders do not receive satisfaction in full in the winding-up of the Company of all sums due or to fall due to them, then the aggregate shortfall between all sums due or to fall due to the Shareholders and all amounts actually recovered by the Shareholders (whether by direct payment or the exercise of any right of set-off or otherwise) shall be calculated and apportioned between the Shareholders in the Relevant Proportion at that time and payment shall be made between the Shareholders to ensure that each Shareholder bears its respective share of the aggregate amount of such shortfall.’
TAGMA’s trade was unsuccessful; it entered liquidation in July 2005. TAGH made a claim for £3 million against the taxpayer under clause 10.3, relating to the proportion of the sums unrecovered by TAGH plus interest. The taxpayer claimed an allowable loss of £3 million (under s 253(4)) in his self-assessment return for the tax year 2007/08, in respect of the payment made to TAGH. However, HMRC restricted the allowable loss to £403,407, on the basis that relief for equity losses could not be allowed. The issues for the First-tier Tribunal included whether clause 10.3 of the shareholders’ agreement involved the taxpayer giving a guarantee of a qualifying loan. Unfortunately for the taxpayer, the tribunal concluded that clause 10.3 was an indemnity, not a guarantee. As the taxpayer failed on the guarantee issue, section 253(4) was not engaged. The taxpayer’s appeal was dismissed.
Unlike the CGT relief for loans to traders (in s 253(3)), HMRC acknowledges that relief is available for guarantee payments in respect of the outstanding loan, or of interest in respect of it (CG65992). However, documentary evidence to support the existence of a guarantee (e.g. a demand for payment) should be retained in case of an HMRC enquiry into the loss relief claim.
This article was first published on the Bloomsbury Professional Tax blog (https://tax.bloomsburyprofessional.com/blog)