Tax Relief for Payments Made Under A Guarantee

There has been a very helpful case regarding tax relief for payments made under a guarantee.

The case, Peter Goldsmith (TC02194) was published on 5 September 2012 in which the First-tier Tribunal held that a capital loss was allowable under TCGA 1992 s 253 where an individual was required to make a payment under a guarantee.

Mr Goldsmith was a director of Efrussy Trading Company Limited (Efrussy) In 1987 Efrussy took out a bank loan and Mr Goldsmith acted as a guarantor. In 1984 the bank demanded immediate repayment of the loan and as the company did not have sufficient funds to make the repayment Mr Goldsmith was required to make the payment under the guarantee. Efrussy was eventually dissolved in 1995. Mr Goldsmith claimed that a loss had arisen under TCGA 1992 s 253.

TCGA 1992 s 253 provides relief for loans to traders where an individual makes a qualifying loan. A qualifying loan is one which:

• Is used by the borrower wholly for the purposes of a trade carried on by him (excluding money lending);
• The borrower is resident in the UK; and
• The debt is not a debt on security.

Where the loan becomes irrecoverable a capital loss can be claimed under s 253. Under s 253(4) these provisions are extended to include payment under a guarantee where:

• An amount of the loan and/or interest has become irrecoverable  from the borrower; and
• A payment is made under a guarantee; and
• The guarantor has not assigned any right to recover any amounts which have accrued to him in consequence of the payment made under the guarantee; and
• The borrower and the lender are not spouses or civil partners or companies in the same group.

HMRC denied the claim for loss relief on the basis that:

• There was no evidence that Mr Goldsmith was called on in his capacity as the guarantor to make the payment;
• The loan had not become irrecoverable as it was irrecoverable at the time it was made.

The tribunal did not accept these arguments. They found that in 1987 a commercial lender had been prepared to lend money to a company which has bought two properties and which had offers on the table for the resale of the properties at a profit. This was good evidence as to the recoverability of the loans at the time they were made. As regards the question of whether the payments were made in Mr Goldsmith’s capacity as a guarantor they found that the legislation requires the payments to be made under guarantee rather than a particular capacity of the person making the payments. They noted that the guarantor could be deemed to have made a payment under a guarantee even where the lender had not called on this guarantee. The FTT concluded that the payments were made under the guarantee.

The capital loss claim under s 253 was allowed.

The case also considered Mr Goldsmith’s claim that the loan was an asset which had become of negligible value and that the loss could be relieved against income under ITA 2007 s 131. This claim was dismissed.

To summarise, this case demonstrates that where a loan is taken out from a third party this is good evidence that the loan is recoverable at the time it is made.

However, if the parties are connected the recoverability should be clearly documented at the time the loan is made, such evidence to include cash flow forecasts, details of the sales pipeline etc.

Where payments are then made under a guarantee these can give rise to an allowable capital loss.

To avoid the matter going before the tribunal, clients should ensure that they keep all correspondence with the lender regarding not only the provision of the loan itself but also the reasons for the payment under the guarantee etc.

Finally, to claim a loss against income there must be a loss on shares, and a number of other strict criteria met, not a loan or payment under guarantee.