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Loan loss gives director tax headache

A struggling company facing liquidation leaves a director facing a loss over a loan, but what are the tax implications? A recent Tax Discussion Group debated the options.

February 2018

At a recent Tax Discussion Group meeting, one accountant explained that his client, UK tax resident Mr X had made a loan to a UK trading company. He explained that the company had previously been issued shares that qualified for Enterprise Investment Scheme (EIS) relief, and that Mr X was a director and shareholder of the company.

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After a period of trading profitably the company had experienced a downturn and Mr X had made a loan of £100,000 to the company to assist with its cashflow. The accountant explained that the company had drawn up a loan agreement, and agreed to pay interest on the loan to Mr X.

Sadly, the company’s downturn has proved to be more severe than expected and it was in financial difficulty. Mr X is expecting that the company will need to appoint an insolvency practitioner, and enter a Creditors Voluntary Liquidation (CVL).

The main query the accountant had was whether Mr X would be eligible for debt relief should the company debt prove irrecoverable.

In the discussions that ensued it was confirmed that Mr X’s irrecoverable loan appeared to meet the conditions as the company was eligible for EIS. Accordingly, the irrecoverable loan could be offset against future chargeable gains incurred by Mr X if he elected to claim under s253 TCGA 1992. Sadly, as this is a loan to a trading company, rather than shares, the loss he suffered would not be able to be offset against his taxable income.

However, he would also be able to claim that his shares in the company had become of negligible value, claiming either the capital loss or alternatively he could claim against his taxable income under s131 ITA 2007.

Each month, with the exception of July and August, the Tax Discussion Groups [TDG] in Croydon and South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend and normally cover over a dozen tax issues raised by those attending.

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