A director spends years funding their own company out of pocket, then the company fails, and the money is gone. The instinct is that a loss this real must be relievable somewhere. Often it is not.
Section 253 of the Taxation of Chargeable Gains Act 1992 is the route that can rescue it, treating an irrecoverable loan to a trading company as an allowable capital loss of up to the full principal. But the relief for loans to traders is narrow, and the conditions are exact:
- the loan must qualify,
- the debt must be genuinely irrecoverable,
- the debt must be outstanding when the claim is made,
- the lender must not fall within the limited relationship exclusions for spouses or civil partners living together, or for companies within the same group, and
- the lender must not be barred by having caused the loss.
Miss any of those and the loss is either denied or stranded in a year it cannot be used. The most damaging errors happen before the claim is even made, when the director converts the loan, misreads the connected party rules, or claims the whole loan account rather than the money lent.
Here is how the s253 relief works, and where these claims fall apart.
What Relief for Loans to Traders Gives You
Normally, if someone owes you money and never pays it back, you get no tax relief for the loss.
Section 253 is the exception. If you lent money to a trading company and it has become irrecoverable, you can treat it as a capital loss and set it against your gains, as if you had sold an asset at a loss. For a director who has funded their own company, that can turn a total write-off into a real tax saving.
The relief does not stretch to everything on a loan account, though. It covers the money you lent, not the interest on it, so unpaid interest is out. And it covers only genuine lending: if your loan account is padded with reimbursed expenses or pay that was credited but never drawn, those parts are not money lent and cannot be claimed.
Quick example: Person S lends to their own company
Person S is a director of S Ltd, a small property development company. Over several years, Person S puts £520,000 of their own money into the company to fund a build, all recorded on the director's loan account.
The finished property sells for far less than it cost. The bank is repaid first, and once the dust settles, only a fraction of the loan comes back, leaving £300,000 owed to Person S that the company simply cannot pay.
On the general rules, that £300,000 would give no relief at all. Under section 253, because the money was lent to a trading company and is now irrecoverable, Person S can claim it as a £300,000 capital loss and set it against their gains.When a Director's Loan Qualifies for s253 relief
Section 253 does not relieve every loan that goes bad. Two conditions must be met:
- It should be a qualifying loan. The money must be lent for the company's trade, and the loan must meet the specific tests in section 253(1).
- The debt should be genuinely irrecoverable. There must not be a reasonable prospect of the company ever repaying it, not merely a missed repayment.
We take each in turn below, then work through an example of a clean claim.
A qualifying loan under section 253(1)
A qualifying loan is any loan lent to a trader for their trade and not dressed up as a marketable security.
Section 253(1) sets out three conditions, and the loan must pass all three:
- It was for the company's trade. The money must have been used wholly for a trade the company carries on, and that trade cannot be money lending. Money spent getting a trade off the ground counts too, so advances made before the company started trading can still qualify.
- Residence, but only for older loans. This one matters only if the loan was made before 24 January 2019. For anything lent on or after that date, ignore it.
- It is not a debt on a security. The debt must not be dressed up as loan stock or a similar marketable instrument. A normal director's loan account, with nothing more than book entries behind it, is not a debt on a security, so this is rarely an issue.
In practice, for an owner director lending to their own trading company, the first condition is the one that decides it. The company must be genuinely trading, and the money has to have gone into that trade, not into a property investment, not into another venture, and not into the director's own pocket.
Court case: Robson v Mitchell [2005] EWCA Civ 585
This case is a good example of the trade purpose condition, and it decided the claim on its own.
The material facts were:
- A director was the sole owner of his development company. The company carried out building work on a property the director owned personally, with no contracts and no invoices for the work.
- The company's bank borrowing was later refinanced into a new bank loan, which the director had guaranteed.
- When he was called on the guarantee, the director paid the bank and claimed relief for the amount he had paid.
Genuinely irrecoverable, not just unpaid
A loan the company has simply not paid back is not enough on its own. HMRC tests whether there was no reasonable prospect of recovering the money on the date claimed. That means weighing what the company could realistically find to pay you, not just reading its balance sheet on the day.
Two things tend to decide it:
- If the company is still trading, even at a loss, the starting assumption is that the loan can still be recovered. Shifting that assumption is hard.
- If the company has stopped trading, with no assets and no way of raising funds, the loan is far easier to treat as irrecoverable. The clearest case is a company that has sold its only asset, repaid its bank, and had nothing left.
Either way, the question is judged on the facts as they stood when the loan became irrecoverable, not with the benefit of hindsight.
Example: A loan that was doomed from day one
This shows the flip side of the condition. A loan must become irrecoverable, which means it must have been recoverable when it was made.
The facts:
- Person K set up K Ltd, a small events company, and lent it £220,000 on day one. The company had no trading history, assets, contracts, or realistic prospect of earning income to repay that sum.
- K Ltd never traded successfully. Within a year it folded without earning meaningful revenue.
- Person K claimed section 253 relief, arguing the £220,000 had become irrecoverable.
The claim would fail. On these facts, the money was never recoverable to begin with: it went into a company with no means of repaying it, so it did not become irrecoverable; it simply was never recoverable. Section 253 relieves a loan that turns bad, not one that was bad from the outset. And if the money was really risking capital dressed up as a loan, that only underlines the point.
What If the Company Goes Into Liquidation?
This is the uncertain corner of the relief. Whether you can still claim turns on two things:
- what you have done with the loan, and
- how far the company's wind up has gone.
If you leave the loan alone
If you have not released or converted the loan, it is simply an unpaid debt sitting in the liquidation. The question is whether it is still "outstanding" for section 253 once your right to sue has become a right to prove in the liquidation.
The Upper Tribunal in Bunting did not decide this. It was raised but left open, to be argued in a case that turns on it. Its provisional view, though, was that "outstanding" may well be wide enough to cover a right to prove in the insolvency. So the likely position is that a live, unreleased loan is still outstanding during the liquidation and a claim should hold.
If you release or settle the loan
This is where claims are lost, and it has nothing to do with liquidation as such. If you give up the loan in exchange for something, the part you release is no longer outstanding and cannot be claimed:
- Release the whole loan for shares or other assets, whatever their value, and you get no relief on it. That is exactly what happened in Bunting: £2.2 million of loan was released for worthless shares, and the Tribunal held there was no outstanding amount left to relieve.
- Take genuine part repayment and keep the rest as a live debt, and only the repaid part is gone. The unpaid balance stays outstanding and remains claimable.
The trap is doing something with the loan before you claim on it. Convert or release first and you can destroy relief you would otherwise have had.
If the company is dissolved
Dissolution is the real deadline. Once the company is struck off it ceases to exist (Companies Act 2006, s.1000), and its remaining rights pass to the Crown as bona vacantia (s.1012). With no debtor and no debt, the strong argument is that nothing is outstanding and no claim can be made.
Bunting did not decide this either, it left insolvency and dissolution open, but it is the likely outcome and the one HMRC can be expected to take. Treat it as the point of no return.
Example: Person J claims in time, then imagines leaving it too late
This shows why the timing matters more than directors expect.
The material facts of the case are:
- Person J is a director of J Ltd and is owed £340,000 on the loan account.
- The company fails and goes into liquidation, and the liquidator confirms Person J will get nothing back on the loan.
While the company is in liquidation, the loan still exists and is plainly irrecoverable, so Person J claims section 253 relief for the £340,000 and sets it against gains for the year. The claim is good.
Now, if Person J had done nothing until J Ltd was dissolved and struck off, the company, and the debt, would have gone with it. There would be no loan left to claim on, and the relief that was there during the liquidation would be lost.What If You Guaranteed the Loan Instead
Directors often do not lend to the company directly. They guarantee the company's bank borrowing, then get called on when the company fails. Section 253(4) provides a parallel relief for guarantors.
The shape is similar, but the trigger and the timing differ:
- The loan guaranteed must be a qualifying loan (ignoring the debt on a security condition), and the outstanding amount must have become irrecoverable from the borrower.
- The relief arises when the guarantor makes the payment under the guarantee, not when a claim is made. The loss is treated as accruing at the date of payment.
- The loss is the payment made less any contribution payable by a co-guarantor. If others guaranteed the same debt and can be made to contribute, the claim is reduced accordingly, whether the guarantor pursues them.
A guarantee claim for capital gains tax must be made within four years of the end of the tax year in which the payment was made.
Worked example: S Ltd, a guarantor claim reduced by contribution
Person S guaranteed the company's bank borrowing alongside two fellow directors, then had to pay when the company failed.
The facts:
- Person S and two fellow directors each gave a joint and several guarantee of S Ltd's £600,000 bank facility.
- The company failed, the bank called the guarantee, and Person S paid the £600,000 in full.
- Both co-directors were solvent and could have been made to contribute their shares.
How to Make a Claim for Relief for Loans to Traders
The lender must make the claim. There is no special form to make the claim, but it pays to be precise:
Make the claim in your Self-Assessment return for the year in which you are claiming. If that return has already been filed and can no longer be amended, make it as a standalone claim instead. State that relief is claimed under section 253, name the company, give the amount, and specify the earlier date under section 253(3A) if you want the loss in that year.
You do not need to wait for the company to be struck off. The test is that the money has become irrecoverable, not that the company has been dissolved.
Which tax year the loss lands in
By default, the loss falls in the year you make the claim. But you can push it back to the year the loan actually went bad, which matters if that is where your gains were.
To do that, you name the earlier date in the claim. There is a catch: that date has to be within two years before the start of the tax year you are claiming in. Miss that window and you cannot reach back to it.
Say a loan became irrecoverable on 5 December 2029. Whether you can still use that date depends on how long you wait:
So, if you want the loss in the year the loan went bad, claim in good time. Wait too long, and that date slips out of reach, leaving the loss in a later year where it may be no use to you.
If the Loan Is Later Recovered
The relief is not final. If any of the money later comes back to you, some or all of it is clawed back. You are treated as making a chargeable gain at that point, equal to what you recover, up to the loss you originally claimed.
Recovery is read widely. It is not just the company repaying you directly. If you, or anyone acting for you, receive money or money's worth for the debt, or for giving up the right to it, that counts. And if you assign the right to recover on any terms other than a genuine arm's length bargain, you are treated as having received its full market value, whatever you actually got for it.
This bites most often on a strike off that turns out better than expected. If the company pays anything out to you as it is wound up or struck off, after you have claimed the relief, that payment is a recovery and triggers a gain.
Worked example: S Ltd, a clawback strikes off
Person S claimed relief of £300,000 on the irrecoverable loan to S Ltd and set it against gains in that year.
Eighteen months later, a VAT repayment and a small insurance refund left the company with £25,000 in the bank. On strike-off, that £25,000 was paid to Person S.
Under section 253(5), a chargeable gain of £25,000 arises at the date of that receipt, clawing back part of the relief. The remaining £275,000 of relief stands.Where Section 253 Claims Go Wrong
Most failed claims we see aren't close calls on the law. They are avoidable errors made before anyone picked up the phone to us. Four come up repeatedly:
- Converting the loan before claiming. Swapping the loan for shares, so no loan remains to be relieved.
- Assuming the loss is clogged. Believing the loss can only offset gains made with the same company because the director controls it.
- Claiming the whole loan account. Putting interest and reimbursed expenses into the claim alongside the money lent.
- Causing the loss yourself. Structuring the loan, or the company's affairs, so that the non-recovery is the director's own doing.
Each one either shrinks the claim or destroys it. We take them in turn.
Converting the loan before you claim
A common move is to swap the irrecoverable loan for shares in the company, hoping to crystallise a loss on the shares. This can backfire on both fronts. If the shares were always worthless, they never became of negligible value, so there is no income tax loss on the shares. And once the loan has been converted, there may be no outstanding loan left to relieve under section 253 either.
The safe sequence is to claim on the irrecoverable loan first, then deal with any conversion afterwards. Converting first can leave you with relief on neither the loan nor the shares.
Court case: HMRC v Bunting [2025] UKUT 96 (TCC)
This case shows the trap exactly.
The facts:
- A director had lent his company over £3 million.
- As the business failed, £2.2 million of the loan was exchanged for new ordinary shares, aiming to create a loss.
- The share loss failed, because the shares were always worthless and so never became worthless. The director then claimed section 253 relief on the loan instead.
Assuming the loss is clogged
A director controls the company, so the instinct is that any loss on dealings with it is a clogged loss, usable only against gains made with that same company. The clog rule does exist: a loss on a disposal to a connected person can only be set against gains made with that person, and a company is connected with whoever controls it.
But the clog only applies to a loss on a disposal. A section 253 loss on an irrecoverable loan does not come from a disposal at all. The relief simply deems a loss, with no asset changing hands, so the clog rule never engages. The loss is available against gains generally.
Worked example: Person A and A Ltd, the clogged loss myth
Person A owns and controls A Ltd. A Ltd's trade fails, and Person A's £250,000 director's loan becomes irrecoverable. In the same year, Person A makes a £400,000 gain on an unconnected commercial property.
Person A worries the loan loss is clogged, usable only against gains made with A Ltd, of which there are none.
It is not clogged. The loss arises under section 253 without any disposal to A Ltd, so section 18(3) does not apply. The £250,000 is set against the £400,000 property gain in the normal way.Claiming interest and expenses, not just principal
A director's loan account is rarely pure lending. It often mixes cash advanced with reimbursed expenses, mileage, use of home, and sometimes credited but unpaid remuneration. Only the money actually lent qualifies.
- Interest is excluded outright. The relief runs to outstanding principal only.
- Reimbursed expenses are not money lent, so they fall outside section 253(1) and must be stripped out of the claim.
- Credited but undrawn remuneration is not money lent either. It never left your pocket as a loan, so it fails the section 253(1) test for the same reason as the expenses.
Separately, section 253(10) blocks a section 253 loss on any amount that is already relieved in computing your own income, for instance a debt you have written off as a deduction in your own trade. That stops the same loss being claimed twice, once against income and again as a capital loss. It is unlikely to arise on an ordinary director's loan, but it is worth knowing it is there.
The fix is to reconcile the account back to cash actually advanced before fixing the figure. Claiming the headline balance rather than the true principal overstates the loss and invites a challenge.
Non-recovery that is your own doing, section 253(12)
Section 253(12) blocks relief where the amount became irrecoverable because of the terms of the loan, arrangements of which the loan formed part, or an act or omission by the lender. The non-recovery must flow from the company's genuine inability to pay, not from something the director engineered.
An interest-free loan repayable on demand does not fall foul of this, because no term prevents repayment. What matters is whether the director's own conduct, rather than the company's trading failure, caused the loss.
Court case: Cann v Woods [1999] STC (SCD) 77
The facts:
- A lender backed a struggling company for years, then stopped funding it and sold its assets.
- HMRC argued the loans became irrecoverable because of its own decision to stop lending and sell, which would fall foul of the rule.
Conclusion
Relief for loans to traders can turn an irrecoverable director's loan into a capital loss worth up to the full amount lent. But it only works if the loan qualifies, the debt has genuinely become irrecoverable, and the claim names the right year while that year is still in reach.
The rest is avoiding the errors that cost people the relief: converting the loan before claiming, treating the loss as clogged, or claiming interest and expenses alongside the money actually lent. Each one shrinks the claim or costs you the claim, and waiting too long can put the year you wanted out of reach for good.
If you are holding a director's loan that cannot be repaid, take advice before you claim, not after. Getting the amount and the timing right the first time is what turns a bad debt into a real tax saving.
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