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Using Tax Relief to Your Advantage When Loans & Investments Take the Wrong Turn

What do you do when investments take the wrong turn and irrecoverable loans threaten to ruin your financial bottom line?

Most people hardly think of tax relief, yet this is one of the best ways to recoup from such financial problems.

COVID-19, for instance, has presented unprecedented financial challenges to businesses. Even the different relief programs and alternative sources haven’t held the fort for business owners who weren’t prepared for a sudden economic recession.

If a business winds up in a catch-22 where it has to permanently reconsider its size and type of dealings – or quit the business altogether–many taxpayers suffer between a rock and a hard place. Loans made to businesses go unpaid for good, and shares invested in firms lead to losses.

According to Nick Giles, Tax Consultant at Page Kirk LLC, “It sounds like fleeting comfort, but our tax system offers a way to recoup some of the financial losses incurred in such a catastrophe and taxpayers who wind up here must make the most of all the reliefs they qualify for.

Irrecoverable loans

“Relief number-one goes with loans that have turned irrecoverable. This happens where a person has lent a lump sum to their business, a relative’s business, or an unconnected business. These loans could also be a credit deficit on a director’s loan account or a consensus to stretch a company’s credit term beyond the standard terms in the relevant trade.

“As long as the borrower spent the loan amount for the intended business purpose and the lender hasn’t enjoyed tax relief for it as a trading expense, the irrecoverable loan is still claimable by the lender as an acceptable loss for capital gains tax reasons.

“Claiming this relief means the loss is set against a person’s capital gains, potentially saving a taxpayer capital gains tax at somewhere between 10% and 28% rate, per their income level and the asset in question. This ensures they receive a portion of the loss incurred on the irrecoverable loan.”

Losses incurred in shares 

Relief number-two, according to Giles, is where a taxpayer invests shares in a company and winds in potential loss.

“Let’s say the firm sells shares for less than the buying price or, maybe, it shuts down, and the person’s share during the closure fund disbursement is less than the original lump sum they spent on shares.

“Incurring a loss on shares is a capital loss, also entitled to tax relief against an individual’s capital gains. But for specific shares, these losses can be balanced against the taxpayer’s income.

“Many factors go into consideration, but the shares must be linked to an unquoted trading firm and mostly to owner-run enterprises. EIS businesses are also entitled.

“Filing this claim can lead 20% to 45% rate relief powering a taxpayer to recover, sometimes, up to almost half of the lump sum they lost to the shares.

Final Words

This post is only a summary of the two reliefs; terms & conditions go beyond what we’ve discussed above. 

Please do further research or work with a professional to enjoy maximum tax relief.