Tax relief for payments made as guarantor

Instead of making a loan to a trader some business owners act as guarantor for a loan. If the loan or the interest on the loan becomes irrecoverable leaving the guarantor liable, then an allowable loss could be claimable. Note that the relief is reduced by any amounts payable by co-guarantors.

The claim for the relief must be made within four years of the end of the tax year the guarantor made the payment for the guaranteed amount. If, after the relief has been received, any amount of the loan or the interest, or any part of the guarantee payment is recovered, then the amount received is treated as a chargeable gain. This chargeable gain arises in the year the payment is received and at the time of receipt.

Does any sort of loan qualify?

No, not any sort of loan qualifies and that means the guarantee relief is applicable only for loans that qualify. The loan must be for a borrower who:

• is resident in the UK
• uses the money wholly for the purposes of a trade
• uses the money to set up a trade, and starts trading

What are the conditions for the tax relief for guarantee

The guarantee for a loan must meet the necessary conditions. The relief can be given for a guarantee of a loan which is a security. Some part of the loan or the interest on the loan must be outstanding at the date of the guarantee payment and the amount must not be recoverable from the lender.

Relationships

The borrower and lender must not have been spouses or civil partners before, after, or when the loan was made. Neither should either lender or guarantor have been spouses or civil partners when the guarantee was given. See more about which loans qualify and the conditions here.

Your son takes out a £15,000 bank loan to set up bakery, and you provide a personal guarantee for the loan. After successfully trading for a year the business fails and the loan cannot be repaid. The bank calls on you, the guarantor to pay £15,000. The guarantor can claim an allowable loss of £15,000 in the year the payment is made.

How to get the tax relief for guarantee and how it is worked out

Advice should be sought on the relief that can be claimed. For example, if there is more than one guarantor and a guarantor is entitled to receive payments from a co-guarantor then only the amount each individuals pays under guarantee will be treated as an allowable loss. If a co-guarantor is unable to make a payment, the liability of the other guarantors will be increased accordingly.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.