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Relief from Capital Gains Tax for loans to traders

Posted on 12th March 2020

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As previously announced, Budget 2020 enables provision to be made in the Finance Bill 2020 for relief from Capital Gains Tax on loans to traders to be extended to loans made worldwide rather than just to UK resident entities as is currently the case. This rule change has retrospective effect for loans made from 24 January 2019.

Capital Gains Tax relief for loans to traders applies where a loan is made to a UK company, sole trade or partnership for the purposes of an ongoing trade, profession or vocation, or the setting up of trade, and the loan subsequently becomes irrecoverable.

Under existing rules, to qualify for relief the loan must be to a borrower:

  • who is resident in the UK
  • uses the money wholly for the purposes of a trade, profession or vocation; or
  • to set up a trade as long as they start trading

Relief is only due if there is no reasonable prospect of the loan ever being repaid, and where claimed it allows a person to write the loss off against chargeable gains.

The new legislation extended the relief so that it applies to borrowers who are located anywhere in the world, complying with the European Commission opinion on the interpretation of freedom of movement of capital rules.

This is a limited but potentially valuable relief from Capital Gains Tax where money is lent to an offshore trade and is ultimately irrecoverable.

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