Capital loss of the convertible loan to a EIS company

[kevincab]

Hi all, I have a questions in regards of the capital loss of the convertible loan.

I have made a £44k loan to a Company (which is qualified as a Enterprise Investment Scheme company) and the Company subsequently repaid £4,000 back to me and leaving a balance of £40K at liquidation (the Company has not closed at the end of the 2015/16 tax year but I have been informed by the liquidator that there is no recovery). The loan is a convertible loan and it was not converted to shares prior to the liquidation.

I just want to confirm whether I can claim £40K as the capital loss in the 2015/16 or 2016/17 tax return in order to offset some other income tax or capital gain tax.

Many thanks.

[kevincab]

Anyone got any ideas? Many thanks.

[AnthonyR]

CGT relief is available when a loan to a trader (or trading company) becomes "irrecoverable".

HMRC guidance is:

Relief is only due if the loan has become irrecoverable. This doesn’t mean merely that the borrower can’t repay the loan at the date you make the claim. You have to show that there was no reasonable prospect of the loan ever being repaid. If the borrower continues to trade this test is unlikely to be satisfied.

The loan must have become irrecoverable. Relief won’t be due if the loan was irrecoverable when it was made. If you make a claim shortly after making the loan this may cast doubt on whether the loan was ever recoverable. The loan must not have become irrecoverable as a result of the terms of the loan or some act or omission by the lender.

The question will be when the loan became irrecoverable, which is only a matter of fact. However, if the company went into liquidation with minimal/no assets in 15/16 then it's likely to have been irrecoverable that year.

The other thing to note is that a sideways loss relief claim under s.131 only applies to shares and securities, not loans, so in order to offset against income you would have needed to capitalise when the loan still had value.

[kevincab]

Many thanks Anthony, your answer is really helpful.