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CGT relief: loans to traders - directors bad debt

DLA (owing to director) bad debt on exiting company - CGT relief: loans to traders?

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Hi all,

I have a client who, prior to being my client, set up a successful company. They brought in outside equirty funders which ended up with an acromonious split.

The company bought out the directors shares (share buy back). There was a large directors loan outstanding at the time.

My client received money for the shares, and a dividend pre exit, but did not have his DLA repaid. This is a contentious issue. The client think that they have written it off after he exited. The arrangement was that it would be a clean break (I am waiting to see the paperwork but assuming that this is true...).

Given that dividends are dividends, and that consideration for the shares is the consideration for the share, there is no opportunity to recategorise the receipts he received as repayment of DLA.

Would the correct treatment of what has happened to the DLA be a capital loss under s253 TCGA 1992 (CGT relief: loans to traders). This could then be offset against the gain in the year from the sale of the shares.

Your wise thoughts are welcomed!

Replies (7)

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By johngroganjga
22nd Oct 2019 14:07

First of all, there has been no loss - unless the company has since gone into insolvent liquidation and you haven’t told us.

Debtors can’t “write off” loans, only creditors can. If your client is sure that as part of his exit he didn’t agree to waive his loan then it is still owing to him. If the company won’t talk to him he needs legal advice to make them.

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By The Dullard
22nd Oct 2019 14:16

Yes. If the loan has "become irrecoverable" a loss can be claimed. John doesn't know this., because John doesn't do looking it up in the legislation.

You will need evidence that it has "become irrecoverable", rather than simply being difficult to recover. And much will depend on the precise terms of his exit.

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By Tax Dragon
22nd Oct 2019 14:23

Tax-wise, it would have been in everybody's interests to repay the DLA in priority to paying a dividend. I suspect the paperwork will indicate that that's what happened. (If not, then it's as John says.)

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Hallerud at Easter
22nd Oct 2019 14:37

You may want to see if the loan was itself sold to A N Other surviving shareholder.

However I do appreciate you say the company itself bought out the shares which makes that look less likely.

Certainly on the two occasions I have been involved with buying out shareholders we have used external funds to buy the shares and have also purchased the loan balances from the departing directors/shareholders at the same time.

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By fawltybasil2575
22nd Oct 2019 15:45

@ Kylo Ren (OP).

Prima facie, there is a valid claim under S.253 CGTA 1992.

HOWEVER, I note your words:-

“My client received money for the shares, and a dividend pre exit, but did not have his DLA repaid. THIS IS A CONTENTIOUS ISSUE (my emphasis). The client think that they have written it off after he exited”

s.253 requires careful reading of every subsection, including subsection (12).

(i). One needs FIRSTLY to establish whether this was indeed a VALID debt. Clearly your client thinks so currently but, equally clearly (from your reference to the “contentious “ nature of the purported debt) the purchaser currently thinks otherwise.

(ii). SECONDLY, one needs to establish that such valid debt is IRRECOVERABLE.

Assuming that one is then satisfied re points (i) and (ii), one should consider the timing of submitting a Self-Assessment Tax Return which takes such claim into account – if it becomes necessary to submit the Return before the dispute is resolved, then of course one should (assuming that the Return is prepared on the basis that the claim under S.253 is valid) include the appropriate “white space” note re that dispute.

Prudence likewise decrees that one should normally advise the client to make PAYMENT to HMRC based upon the pessimistic assumption that the claim later proves to be INVALID (whether as a result of an amended Return being later submitted, which withdraws the claim; or whether as result of an unsuccessful Tribunal outcome).


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Replying to fawltybasil2575:
By Kylo Ren
22nd Oct 2019 16:04

Tremendous response! Really helpful. Thanks

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By Tax Dragon
22nd Oct 2019 16:25

Bear in mind that it is embarrassing to recover an "irrecoverable" debt. If legal action is current or planned, s253 (to set against the gain on the shares) is a claim you should not be considering.

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