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Losses on Mini-Bond / Loan Note Loans or Investments Eligible for Tax Loss Relief?

Practical Issues
Investor
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Losses on Mini-Bond / Loan Note Loans or Investments Eligible for Tax Loss Relief?

#300414

Postby Investor » April 13th, 2020, 4:35 pm

I've looked far and wide but can't find any specific information on the following: if you lend money via a mini-bond or loan note (typically into a smaller UK company) and they don't give you your money back (such as the well-known London Capital & Finance scenario and, more recently, Basset & Gold), are you allowed to offset that money against either income tax or CGT?

If so, it would be a game-changer and make such loans/investments significantly less risky if you are a tax payer.

Or is there no opportunity to offset against other taxes, as you can do with losses on some other types of investment?

Thanks.

eisman
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Re: Losses on Mini-Bond / Loan Note Loans or Investments Eligible for Tax Loss Relief?

#300979

Postby eisman » April 15th, 2020, 11:50 pm

If a loss is incurred on a qualifying loan made to a trader (including a trading company), tax relief may be available under section 253 Taxation of Chargeable Gains Act 1992. Where relief is available, the loss is a 'capital' loss that can only be used against capital gains.

There are a number of conditions that must be met for the relief to apply, including (inter alia):
(i) the loan must have been used by the borrower wholly for trading purposes;
(ii) the borower must be UK resident;
(iii) the borrower's debt must not be a 'debt on a security'.

A loan note (and I believe also a loan made via a mini bond) would constitute a debt on a security, so is unlikely to qualify.

Investor
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Re: Losses on Mini-Bond / Loan Note Loans or Investments Eligible for Tax Loss Relief?

#337891

Postby Investor » September 3rd, 2020, 11:42 am

Thank you 'eisman'. That's very helpful of you.

The point (iii) you make is critical, as you point out, and means my defaulted loans wouldn't qualify.

It's a pity they don't qualify for any tax relief whatsoever. I've lost quite a bit of money on them.

Peer to Peer lending does qualify for tax relief (on income from other P2P investments).

P2P loans often have a similar risk profile to mini-bonds/loan notes, so this makes P2P loans significantly more advantageous to lend to.

If anybody has any insights on tax relief available on mini-bonds/loan notes I'd be interested to hear your thoughts.


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