When a Business Can’t Repay Your Loan: Understanding Capital Gains Tax Relief for Business Owners
It’s not uncommon for business owners to step in and lend money to their own companies—especially during difficult times when cash flow is tight. It’s a natural move: after all, if you believe in your business, you’ll want to support it. However, not every loan gets repaid. Sometimes, the business just doesn’t bounce back.
When that happens, it’s more than a financial hit—it feels personal. But there’s some good news: if certain conditions are met, you may be able to claim a capital gains tax (CGT) loss for the money you lent. This is known as capital gains tax relief for loans to traders, and it’s something many business owners aren’t aware of—but should be.
Let’s break down how it works and what you need to know.
Why This Matters for Business Owners
Imagine you lent your own limited company £25,000 to help it through a rough patch. Unfortunately, the business later closed and couldn’t pay you back. That money is gone—but does that mean the tax relief is too?
Not necessarily.
Thanks to a little-known piece of legislation, Section 253 of the Taxation of Chargeable Gains Act 1992, you may be able to claim a capital loss on that irrecoverable loan. And in turn, you could offset that loss against any capital gains you have in the same or future tax years—reducing your tax bill.
What Is CGT Relief for Loans to Traders?
In simple terms, this relief allows individuals (not companies) to claim a capital loss when they’ve lent money to a trading business and that loan becomes irrecoverable. It doesn’t have to be your business—you might have lent to a relative’s or friend’s business—but you do need to meet specific conditions.
The relief applies only when:
- The loan was made to a trading business, not an investment or property business.
- The money was used entirely for trade purposes, such as buying stock, paying staff, or covering supplier invoices.
- The loan is unsecured and made directly by the individual (not through a company or trust).
- The loan has genuinely become irrecoverable (not just delayed or inconvenient to collect).
- You are not repaid through some other arrangement (such as being issued shares or being compensated in kind).
- The loan wasn’t made under a tax avoidance scheme or arrangement.
It’s also important to note that you must still hold the loan when it becomes irrecoverable—you can’t claim the relief if you’ve sold it on or assigned it elsewhere.
What Does “Irrecoverable” Actually Mean?
This is a crucial part of the relief. For the claim to succeed, the loan must be genuinely irrecoverable. That might be because the company has gone into liquidation, declared bankruptcy, or is otherwise unable to repay you.
You’ll need to show there’s no realistic chance of the business repaying the loan. This isn’t just about being overdue—it’s about being unrecoverable based on the business’s financial state.
Often, the clearest case for this is where the company has formally closed or gone into liquidation.
What Kind of Businesses Qualify?
To claim this relief, the borrower must be:
- A sole trader, partnership, or company carrying on a trade, profession, or vocation; and
- The funds must have been used wholly for that purpose.
That means you can’t use this relief for money lent to:
- Property rental businesses;
- Investment businesses; or
- Companies where the loan was used for personal reasons.
You also can’t claim if you’re in the business of lending money. This is meant to help individuals who lend in exceptional or supportive circumstances, not professional lenders.
How Much Relief Can You Get?
If the loan meets the criteria and becomes irrecoverable, you can claim a capital loss equal to the amount of the unpaid loan.
For example:
- You lent £20,000 to your trading company.
- The company went into liquidation and had no assets to repay you.
- You claim a capital loss of £20,000.
This loss can be used to reduce your capital gains tax bill. You might offset it against gains from selling property, shares, or other assets in the same tax year—or you can carry it forward to use in future years.
How and When Do You Claim?
You must claim the relief by submitting it to HMRC as part of your Self Assessment tax return. It’s important to provide evidence that:
- The loan exists (e.g., loan agreement, bank transfers).
- It was used for trade purposes.
- It is now irrecoverable (e.g., insolvency paperwork, liquidation notices, or other proof of business closure).
There’s no strict time limit on when a loan becomes irrecoverable—but once you’re certain, you should act promptly. The general deadline for capital loss claims is four years after the end of the tax year in which the loan became irrecoverable.
What Can Go Wrong?
Not every claim is accepted by HMRC. Here are a few common pitfalls:
- Loan documentation is missing: If you didn’t formalise the loan or keep good records, HMRC may question whether it was a genuine loan.
- Loan not used for trading purposes: If some of the money was used for non-business activities, you may only be able to claim part of the loss—or none at all.
- Repayment was possible but not pursued: If you could have recovered the debt but chose not to (e.g., you waived repayment), the relief won’t be available.
If in doubt, it’s always best to get professional advice before making the claim.
Final Thoughts – Turn Loss into Relief
Lending to your business shows commitment—but if things don’t work out, you shouldn’t be left entirely out of pocket. The CGT relief for loans to traders gives business owners a small but valuable form of compensation.
If your company has failed and left you with unpaid loans, don’t write it off just yet—you may be entitled to claim a loss against capital gains, potentially saving you a significant amount in tax.
Need Advice?
At Merranti Accounting, we specialise in helping business owners understand the tax implications of their financial decisions—before and after they’re made. If you’ve made a loan to your business and are unsure whether it’s eligible for CGT relief, get in touch with our team today.
We’ll guide you through the process, ensure your claim is compliant, and help you make the most of every available tax relief.
