Claim for a capital loss for an irrecoverable loan to a trader

If you made a loan to a business which it cannot repay, the amount remaining outstanding may be treated as a capital loss. HMRC requires conditions to be met before it will accept the loss.

What loans qualify?

Except for loans made in the course of carrying on a money lending business, a loan to a trader that becomes irrecoverable will qualify for loss relief if the borrower is resident in the UK for tax purposes. Loans made by one spouse or civil partner to the other are excluded from relief.

What does irrecoverable mean?

You’ll need to show that there was no reasonable prospect of the loan ever being repaid. HMRC’s view is that if the borrower continues to trade, then there is still a chance they could repay the loan; however, this can be challenged if you can show that there was no reasonable prospect of the loan being repaid.

Time limit?

There’s no time limit in which to make a claim. The loss relief will be due at the time you make the claim or, if you prefer, up to two years previously. For example, if you make a claim in 2022/23, you may ask to claim relief in 2020/21 or 2021/22 providing the loan was irrecoverable at that time.

HMRC Helpsheet HS296 (https://www.gov.uk/government/publications/debts-and-capital-gains-tax-hs296-self-assessment-helpsheet) provides more guidance on making a claim.