I have a client who ran a hotel for a number of years as a sole trader. The hotel was purchased pre-2008 and since the crash, it’s value has fallen considerably (about £800k) which resulted in the bank applying considerable pressure to sell up.
The hotel has now been sold, but there will still be about £100k due to the bank. A meeting is to take place between us, the bank and the client in the near future to discuss what is to happen with this £100k, and the potential for it to be written off has been raised (our client has no other savings/assets to offer to pay this).
My thinking now comes to the tax consequences of this write off and I’m considering 3 possible options:
- As a sole trader, the loan relationship rules do not apply. As far as I’m aware, there are no similar provision for individuals.
The loan is a liability, not an asset, and so I don’t think capital gains tax is in question (TCGA 1992 s21).
In addition, I think there is a fair argument that the loan is not part of the disposal of the property because legally it is a separate transaction to the property disposal.
On that basis, the write off is a tax nothing as it simply does not fall into any of the charging provisions of the taxes acts.
- Similar points as argument 1), however treating the loan write off and the property disposal as linked, so arguing the w/o is a capital receipt, and therefore including the amount w/o as proceeds of sale.
This option would still leave us in a large loss position.
- This is the option that’s causing me some worry/doubt.
Under GAAP, the w/o would be a CR to the P&L. For tax purposes, the tax treatment follows the accounts treatment, unless there is legislation or case law which states otherwise.
If we were to argue it is a capital receipt, then fine, we can adjust for it for income tax purposes and treat it as a capital disposal in line with option 1 or 2.
But if it was to be successfully argued, as we’d look to do in point 1), that it is not a capital receipt, then we would not then be able to make a tax adjustment on this basis.
With there being nothing in the income tax rules, that I’m aware of, that would allow us to make a tax adjustment, my fear is that the w/o simply follows the GAAP treatment and is taxable as sole trade income.
Option 3 would be pretty disastrous for the client as it’d lose them their personal allowance and mostly be taxed at higher rate so I wanted to get some other opinions as to the tax treatment before panicking them.