In Douglas Atherley v HMRC [2018] TC06610 the First Tier Tribunal (FTT) found that the write off of a loan to a trading company did result in an allowable capital loss; the facts proved the loan was irrecoverable despite the taxpayer’s unrealistic hope that the remaining balance would be repaid.
If a UK resident individual makes a loan to another taxpayer and it becomes irrecoverable, capital loss relief may be available under s253 TCGA 1992 under the rules for relief for loans to traders .
- The loaned funds must be used wholly for the purposes of a trade or to start a trade.
- There is no requirement that the whole of the principal amount of a loan should have become irrecoverable for relief to be available.
- Relief is denied under s253(12) where the loan has become irrecoverable due to any act or omission by the lender.
In 2010 Mr Atherley, a former stockbroker set up an interior design company and loaned funds to it over a five year period totalling £616,959:
- He had no track record in interior design and the company made losses in excess of £450,000 over several accounting periods.
- One lucrative high profile contract had been secured and it was hoped more would follow.
- In 2013 he wrote off £350,000 against his loans to the company and claimed a capital loss against his 2013/14 capital gains.
- The company ceased trading in 2016.
- HMRC denied the capital loss claim on the grounds that:
- the loan was not irrecoverable; Mr Atherley considered it was theoretically possible for the remaining balance to be recovered and had made a further loan after the write off.
- the write off was only undertaken to generate a loss to match a gain on the disposal of an asset and this was an act of the lender under s253(12).
The FTT found that s253(12) did not apply and allowed the appeal:
- An act in s253(12) must be the sort of act which would prevent the company repaying the loan and there was none here; a decision to cease to carry on an unprofitable trade is not such an act.
- The facts, viewed objectively, evidenced that the loan was irrecoverable; Mr Atherley did not have the track record or resources to break into the “big time”, in interior design losses continued to be made until 2016, and there was no realistic possibility that any lucrative contracts could be secured to generate sufficient profits to repay the loan.
The judge said, interestingly quoting the famous Ramsay case on tax avoidance, "Capital gains tax was created to operate in the real world, not that of make belief… it is not a tax on arithmetical differences."
She also pointed out that had Mr Atherley funded the company with share capital instead of loans, then, due to the level of the company’s losses he could have made a negligible value claim for more than the £350,000 claimed on the irrecoverable loan.
This is the second recent case where the FTT has found in favour of a taxpayer in relation to a loan write off.
See 'Is an Intercompany loan a loan relationship’ for a case where the lender was a company
Links to our guides:
Loss relief (income tax) disposal of shares
External link:
Douglas Atherley v HMRC [2018] TC06610
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