CG66061 - Reliefs: losses on loans to traders: recovery following relief
General
Section 253(5) and (9) of the Taxation of Chargeable Gains Act (TCGA) 1992
Section 253(5) TCGA 1992 ensures that where a loss is deemed to accrue to a lender under section (3), see CG65940, or to a guarantor under section 253(4) TCGA 1992, see CG66020, and the lender or guarantor recovers any part of the outstanding principal (or interest thereon in the case of a guarantee), there is a chargeable gain equal to the proportion of the loss corresponding to the amount recovered. See below as to what amounts `correspond to' recoveries from co- guarantors.
For these purposes, `recovery' includes any money or money's worth received either by the claimant (or someone at his or her direction) in satisfaction of his or her right to recover or in consideration of his or her assignment of that right.
Where an assignment of such a right is otherwise than by way of a bargain at arm's length, the recovery is deemed to be of an amount equal to the market value of the rights assigned.
The example in CG66061 illustrates the treatment of the assignment of rights and recoveries in satisfaction of such rights.
Recoveries on or after 20/3/90: groups
TCGA92/S253 (7) & (8)
TCGA92/S253 (5) only applies where a recovery is made by the person who made the loan or the payment under the guarantee. Section 253 (7) and (8), introduced by FA90/S83, extend the recovery charge to ensure that where
- a loan made by a company has become irrecoverable and Section 253 (3) relief has been given
or
- a company has made a payment under a guarantee and Section 253 (4) relief has been given
a charge arises on any recovery made by another company within the same group at the time the loan was made or at any subsequent time.
Section 253 (7) and (8) apply to recoveries on or after 20 March 1990.
Recoveries 20/3/90: guarantee payments
TCGA92/S253 (6)
Where a payment is made under a guarantee, the guarantor normally assumes the original lender's rights as against the borrower in respect of the payment made. Any recovery from the original borrower will give rise to a charge under Section 253 (5). It is not inconceivable, however, that the guarantor may receive reimbursement from, for example, the original lender who may have recovered other moneys from the borrower. Because that would not be a recovery of the principal or interest, it would not be caught by subsection (5). Section 253 (6), introduced by FA90/S83, therefore imposes a general charge on guarantee payments recovered on or after 20 March 1990.
Example
An example illustrating points made above and in CG66020 is given below.
In June 1988 XYZ Bank Ltd advances £10,000 (without security apart from guarantee) to T, a trader, who uses the money wholly for trading purposes. The whole of the loan is jointly and severally guaranteed by A and B; the guarantee is given in June 1988.
By June 1992, it seems clear that T is heading for bankruptcy; at this stage £8,000 of the principal and £500 arrears of interest are outstanding. XYZ Bank Ltd requires A and B to pay £8,500. Each of them pays £4,250 during the year 1992-93.
A and B claim relief under TCGA92/S253; the Inspector is satisfied that all the conditions, including that of irrecoverability, are met. A and B are both entitled to relief of £4,250.
By September 1993 T, the borrower, is making an unexpected financial recovery. B decides to sell his right to recover £4,250 from T and he does so at arm's length for £850 to C. B is treated as having a chargeable gain of £850 arising in 1993-94.
A keeps his rights and is eventually rewarded in December 1994 by a payment by T of the full £4,250 to which he is entitled. He is assessed on £4,250 for 1994-95.
The purchaser of the rights from B, also receives £4,250 from T in December 1994. He is assessable on a gain under normal capital gains rules for 1994-95.
Co-guarantors: corresponding amounts
Relief under section 253(4) of the Taxation of Chargeable Gains Act (TCGA) 1992 is restricted to the extent that any sums are payable by co- guarantors, see CG66030 to CG66032. Relief for contributions paid by co-guarantors is available to them under section 253(4)(b) TCGA 1992.
Where relief has been restricted in this way and contributions are in fact recovered from those co-guarantors, Section 253(6) TCGA 1992 will not apply to impose a charge. This is because the contributions recovered will correspond to payments under the guarantee for which relief has not been given.
A bank loans X £10,000 and the conditions of section 253 TCGA 1992 are satisfied. The whole of the loan is jointly and severally guaranteed by A and B. X is in a hopeless position and the bank calls in the guarantee. A pays the full £10,000 in June 1990. The Inspector agrees that the loan has become irrecoverable from the borrower, but decides that B's share of the guarantee payment remains recoverable from B. A's loss is computed as follows-
| Payment in respect of principal | £10,000 |
| less amount payable by B | £5,000 |
| Loss for 1990-91 | (£5,000) |
In December 1990, A recovers £3,000 from B. B is entitled to relief in respect of that £3,000, but A will not face a charge under section 253(6) TCGA 1992 because the £3,000 recovered corresponds to part of the £5,000 which did not qualify for relief. None of the allowable loss corresponds to the amount recovered.