When Is a Loan Write-Off Not Tax-Deductible?

Taking into consideration some relatively unknown anti-avoidance regulations, and just how it may apply to smaller family companies.

The loan partnerships regime applies particularly to companies (CTA 2009, s 292 et seq.). A write-off of a debt by a financing or lender company might be ineligible for tax alleviation– even if the matching adjustment in the other company that benefits from the launch is still taxable– where the loan perhaps has an ‘unallowable objective’.

Although less typical, any kind of interest or similar finance costs to money that unallowable purpose could likewise not be permitte

A loan partnership is a ‘money debt that occurred from the financing of money’, so an inter-company loan in between 2 family companies is a loan relationship. Yet if, say, one company pays for some supply for another company, and then recharges that through the inter-company loan account, that would not be a vanilla loan partnership– there was no initial loan.

Nevertheless, the routine is expanded by ‘pertinent non-lending relationships’ (RNLRs)– money financial debts that did not derive from the lending of money and, more specifically, any kind of interest, impairment debits (e.g., uncollectable bills) and debt release transactions in relation to those RNLRs. Hence, crossing out the loan balance attributable to the previously mentioned inter-company recharge would likely drop within that broadened extent.

The loan relationship regime attempts to standardise the therapy of most company financial debt. It starts off merely sufficient, with two key regulations:

• Tax treatment complies with the accounting treatment (so long as the latter was made under usually approved accounting principles (GAAP)).
• There is no capital or profits distinction; so, as an example, a debit problem expense is possibly tax-deductible irrespective of whether it would be taken with the profit and loss on profits account, or the annual report as capital.
  

Nonetheless, these regulations are quickly engulfed in a morass of exceptions.

One of those exemptions is the ‘unallowable function’ guideline, which mentions that a company might not acquire alleviation for a debit in respect of a loan that has an unallowable function (CTA 2009, ss 441, 442).

An unallowable function is one that is not ‘among the business or various other business functions of the company’.

• why the company is a party to the loan connection; or
• why the company has participated in an associated deal– such as any procurement or disposal of rights under the loan relationship (e.g., a complete or partial abandonment, or release of the financial debt).

It follows that a loan connection may initially come about for completely appropriate reasons, however then acquire an unallowable objective in the future; also, deciding to cross out an equilibrium on an otherwise acceptable loan relationship can amount to a ‘related deal’, which subsequently implies that the overall loan partnership acquires an unallowable purpose for that accounting duration.

You may believe this was challenging enough already, but the regulations have a trapdoor to a deeper degree. Basically, the policies until now permit HMRC to attempt to disallow something that it disapproves specifically. But if HMRC refers a ‘tax avoidance function’ to the loan partnership (or related deal), the regulations properly presumes the loan connection has an unallowable purpose by default, unless the company can show that tax evasion was not the main objective, or one of the major functions, of the loan relationship or related transaction.

The majority of the higher-profile instances covering unallowable objective have actually involved intricate funding setups in a group framework, yet the situation that this write-up concentrates on is much less unique, so it ought to be extra relevant to non-specialist representatives and consultants.

At the heart of Keighley and Primeur Ltd v HMRC [2024] UKFTT 30 (TC) was a claim to relief for the price of writing off a loan.

A company (Primeur) had lent circa ₤ 500,000 to another company (VDP), safeguarded against a property in VDP. Two people held the majority of the shares in either company (with each holding just a minority interest). Those two people had additionally offered money to VDP personally, at a comparable scale to the loan from Primeur. VDP after that marketed the property but still did not have adequate funds to repay Primeur and those individual loan providers completely. Primeur took a write-off on its loan to VDP, while the individuals were settled their unsecured loans in full– to recognise the initiative they had made directly to help VDP to sell the property.

To emphasise: with usual director-shareholders in both companies, the directors in the lending institution company Primeur had agreed that Primeur refrain from exercising its safeguarded rights to complete recuperation, so two of the director-shareholders had the ability to get full recovery of their unprotected personal loans to the borrower company VDP (VDP had adequate funds to pay back Primeur completely, however not Primeur and the individuals in full).

Primeur after that attempted to secure tax alleviation for the official write-off (launch) of its secured loaning to VDP, being that preventable shortage.

1. the companies were ‘attached’ so no alleviation was due (see below); or
2. the loan write-off itself suggested that the loan had an unallowable objective in that accounting period of the write-off, so the write-off must not be insurance deductible.

The tribunal made a decision that HMRC lost on (1) due to the fact that the companies were not linked for the purposes of the loan relationships program. As pertains to (2 ), nonetheless, the tribunal agreed with HMRC that Primeur’s making a decision to bypass its secured rights was not ‘amongst the business or other commercial objectives of the company’. Therefore, there was an unallowable function and tax relief for the write-off should be denied to the company.

• It’s not in fact a loan relationship– Not all financial obligation amounts drop within even the expanded extent (consisting of RNLRs). In CJ Wildbird Foods Ltd v HMRC [2018] UKFTT 341 (TC), the taxpayer company made several considerable loans to an additional company; the borrowing company after that asserted alleviation for huge write-offs on the basis that they were extremely not likely to be recoverable in the direct future, so it was proper under GAAP to “make an uncollectable bill arrangement”. HMRC then tried to argue that these were not actually loans however capital contributions. The tribunal differed and discovered that they were certainly within the loan connection regime. Actually, occasionally the taxpayer may try to adapt HMRC’s debate, wishing to escape the routine.
• The companies are ‘linked’– The ‘third key rule’ (see introduction above) is that no debits or credit reports are allowable in respect of loan connections between connected parties (as defined for the routine however broadly as one may expect). In Keighley, the tribunal held that the companies were not attached, despite the shareholders’ aggregate bulk shareholding in both companies, due to the significant limitations on their powers enforced by a third minority shareholder.

Initially, refusing any kind of deductions under this connection test could seem equally as poor but the connection examination generally safeguards the symmetry that any equivalent modification in the loaning company will not be tired. In spite of the judge’s remarks concerning halfway via Keighley that might have you think otherwise, the unallowable purpose test is different: it does not guarantee that balance but concentrates mostly on restricting alleviation for reductions.

Non-binary– one might assume that a loan either has an unallowable objective, or it does not; however the regulations explicitly lays out that any kind of tax modification might be assigned on a simply and reasonable basis.

On basic principles, a formal loan write-off, equally as with crossing out a poor trading financial obligation, ought to be allowed. Or it will certainly also frequently be the case that the companies are linked, so any kind of debits that are forbidden in the borrowing company will certainly be stabilized by the mirror change in the loaning company going untaxed. Yet not all companies run by a family will instantly be linked one with the various other (e.g., one sibling possesses one company; another owns a second company, and they are not acting jointly to regulate both together).

HMRC upgraded its ‘unallowable objective’ advice in 2023 and in May 2025 (see its Corporate Finance Manual at CFM38100 onwards), which recommends it is prominent with HMRC. Their 2024 win in Keighley might well trigger them to test the range more thoroughly for loan write-offs in those family companies that do not gain from the equilibrium implied in linked event standing. Companies and their consultants should be mindful that the tax treatment of loan write-offs or launches may be much less uncomplicated than possibly previously presumed.