When an individual, or a company, makes a loan to a trading business, and that loan is not repaid, the lender can claim a capital loss for the irrecoverable amount under TCGA 1992, s 253. If the funds were provided as a subscription for shares, which have become worthless, the shareholder can make a negligible value claim under TCGA 1992, s 24(2), which also creates a capital loss.
Jeffery Leadley had invested in £25,000 in two different trading companies, receiving shares in return, and lent £334,784 to a third trading company. By 5 April 2010 all of those investments were worthless and Leadley could have claimed relief for negligible value for the shares, and a loss under the loan to trader rules on his 2009/10 tax return. Unfortunately, Leadley died in a road accident on 11 May 2010 before he could submit his 2009/10 tax return.
His executors completed his 2009/10 tax return and included claims for his worthless shares and loan. HMRC rejected those claims, arguing that only the taxpayer could make the claims not the executors, or personal representatives. The First-tier tribunal (FTT) backed the executors, but stipulated that loss from the loan could not be carried forward and set against gains incurred by the executors after the taxpayer’s death.
This makes sense, as the executors stand in the shoes of the taxpayer when completing the final tax return for his lifetime. You may think they should be permitted to make all the claims the taxpayer was eligible to make, had he lived to sign the return. However, the Upper Tribunal has now overturned the FTT decision for both reliefs.
A central part of the negligible value claim is that the taxpayer must hold the worthless assets at the time the claim is made, but as he had died by that date, he did not hold those assets. The executors are deemed to acquire the assets at the date of death. A similar argument applies for the irrecoverable loan.
We encourage all our clients to make claims for irrecoverable loans or worthless shares, as soon as possible, to ensure the loss doesn’t vaporise on death.