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HMRC internal manual

Capital Gains Manual

Losses: loans to traders: example

An example illustrating points in CG66020 and CG66061 - CG66071 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.