Loan to purchase franchise

Loan to purchase franchise

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Client takes out loan to purchase a franchise and the franchise business is a total disaster with no trading to speak of.

Client has other business producing annual profit...........

Is it possible to write off the loan (not the interest)  which was taken out on franchise business by using it as a loss against other self employed  income? Should it be treated as a capital loss?

Replies (9)

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By LyneT
19th Oct 2011 16:07

I may be misunderstanding here, but the loan that was taken out will still have to be repaid regardless of the situation with the business.

Capital losses for loans are allowable under TCGA 1992 (s 251(1) if it is a debt on a security, which broadly speaking is a marketable debt.  It is also the original creditor who will have the loss.

Capital losses on the disposal of some shares may be set off against the investors income.  The shares must be in an unlisted, qualifying trading company.  If the franchise was a trading company and your client had subscribed for shares then he may be able to set off the capital loss against other income.

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Replying to Red Leader:
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By k whyte
19th Oct 2011 16:31

loan

Hi there

Yes the loan was repaid over a number of years - but it was taken out to purchase the franchise.

The business didn,t do any trade and the franchise was taken away again after 3 years  therefore the enterprise

was a total loss.

Can you tell me how the loan should have been treated?

 

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By blok
19th Oct 2011 16:49

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Forget the loan.  It was repaid. 

What did the borrower buy with the loan funds.  Exactly?

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Replying to Vaughan Blake1:
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By cparker87
19th Oct 2011 17:13

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blok wrote:

Forget the loan.  It was repaid. 

What did the borrower buy with the loan funds.  Exactly?

 

Blok's the train of thought is the one to follow. You seem to be confusing the effective negligible value of the capital franchise loss with the loan amount.

Correct me if I'm wrong (anyone!) but, your posts suggest that this franchise was operated personally rather than in a corporate structure. As the Intangibles Regime only applies to Corporates, your bod's effective loss will not be a trading loss. You'll only have a capital loss to use and you can't get at income that way.

 

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By k whyte
19th Oct 2011 18:30

She paid the money over in exchange for goodwill or that was My understanding until last week when she produced a letter saying threre was also equipment included and that she should have returned the equipment when the franchise was terminated. I have to get back to her on that one?

She was a sole trader and this was a separate business venture.

 

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By blok
20th Oct 2011 08:46

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It may be possible that a trading loss has been incurred in the s/t.  If this is the case you have options on how to relieve this loss. What do the accounts for the s/t show?

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By k whyte
20th Oct 2011 11:49

It is in the accounts as Goodwill.

There is also a loss due to the interest on the loan and bank charges.

So rightly the loan is paid off so its actually the goodwill I need to dispose of...

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By blok
20th Oct 2011 12:16

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The deemed nil value of the goodwill is a capital loss, he can relieve this against any capital gains but really thats it.

In hindsight he may have been better introducing the funds into a company as share capital and this may have given him an option to offset the loss on the negligible value of shares against his other income.

Have a look at the franchise document to make sure you understand what was paid for what.

The loss created by the loan interest should be available to be set against other income.

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By k whyte
20th Oct 2011 15:54

Thank you so much - thats clear now. I m waiting to hear back from the client with regards to the franchise payment.

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