The recent tribunal case of Goldsmith (TC2197) dealt with availability of loan loss relief for capital gains tax purposes and its subsequent conversion as an Income Tax loss.

Mr Goldsmith was the Director of a property trading company. The company took out loans from a bank in order to purchase two flats, which Mr Goldsmith personally guaranteed.

One flat was sold and the other was let out, however the rent received from the flat was less than the interest payments on the loan. As a result Mr Goldsmith made payments directly to the bank to make up the shortfall.

As a result of the situation the bank demanded full repayment of the loan, with the second flat sold at a loss and the company dissolved.

The taxpayer claimed loan loss relief under TCGA 1992 s.253 (loans to traders) and for the loss to be offset against his other income under ICTA 1998 s.574.

HMRC denied the loan loss relief claim as they argued that the loan was irrecoverable at the outset and therefore did not become irrecoverable. Furthermore HMRC felt that there was no evidence that the repayment was required through the bank guarantee and therefore did not meet the statutory conditions.

The tribunal ruled in favour of the taxpayer in relation to the loan loss relief claim. They said because the bank had decided to lend money to the taxpayer’s company this meant that the loan cannot have been irrecoverable at the outset as a bank would not make such a loan.

It was also found that lack of evidence of a demand to the guarantor was not on its own sufficient to deny the loan loss relief claim.

The borrowed money was used for the purposes of the company’s trade and the money was paid by the taxpayer as interest on the loan. As a result the tribunal ruled he was entitled to claim loan loss relief under s.253 for the difference between the rent received and the interest payments made.

HMRC argued additionally that even if loan capital loss relief was allowed there was no basis for setting the amount against general income. The tribunal agreed and so the taxpayer’s appeal was only allowed in part.