Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about losses on loans in an estate.
‘We have been asked to look at a tax issue relating to a deceased’s estate, whereby the first spouse (our client’s father) died intestate in 2016 and the assets of his estate included a claim for a director’s loan balance of £410,000.
A deed of variation was made by the six children within two years of the date of death, under which all of the assets were left to their mother.
The mother also died intestate in 2019 and the claim for the director’s loan balance was still unresolved at this time; accordingly the claim for this amount passed to the personal representative of mother’s estate.
In 2020, a distribution in respect of the director’s loan balance was made from the liquidation of the husband’s company in the sum of £140,000. Ordinarily, a capital loss in the sum of £270,000 has been crystallised but can the personal representative claim this loss against sales of other property? It would appear not from our reading of TCGA 1992, s 253 (3)(b).
What are readers’ thoughts on this?’ Query 20,063 – Spooky.
Terry Jordan’s reply: Unlikely that allowable loss can be claimed.
‘Spooky’s client’s father died without a will in 2016 leaving a widow and children. Under the intestacy rules at the time the widow would have been entitled to the father’s chattels, a statutory legacy of £250,000 (subsequently increased to £270,000) and one-half of the residue of the estate with the other half passing outright to the children in equal shares on the premise that they were over 18. The children executed a deed of variation within two years of the father’s death redirecting all assets to their mother so that they would have retrospectively qualified for the inheritance tax spouse exemption. The assets included a director’s loan balance with a face value of £410,000.
The mother died, also without having made a will, in 2019 so the children would have become absolutely entitled in equal shares and, in 2020, a payment of £140,000 was received in respect of the loan on liquidation of the company.
The key question is the nature of the asset, and a similar issue was considered in Readers’ forum query 20,027. As Robert Maas and Rossini pointed out, a debt in the hands of the original creditor is not a chargeable asset unless it is a debt on a security (TCGA 1992, s 251 (1) and s 132). HMRC’s Capital Gains Tax Manual at CG53422 says: ‘The meaning of debt on a security has been considered by the courts a number of times. The leading case is W T Ramsay Ltd v CIR 54 TC 101. In that case the House of Lords acknowledged this is a difficult subject. Lord Wilberforce said: “Many learned judges have found it baffling both on the statutory wording and as to the underlying policy”. These instructions approach these problems by looking at the decision in Ramsay and considering what guidance can be drawn from the speeches of Lords Wilberforce and Fraser.’
As the father’s estate, following the variation, would have been entirely covered by the inheritance tax spouse exemption HMRC would probably not have considered the values returned and they would not have been ‘ascertained’ under s 274. If the loan was a chargeable asset for CGT purposes the widow’s base cost would have been its value in 2016: s 62(1)(a) and similarly the mother’s personal representatives’ base cost would have been the 2019 value. Spooky refers to s 253(3)(b) and s 253(1)(c) excludes debts on a security as defined in s 132.
My conclusion is that it is unlikely that an allowable loss can be claimed unless the loan was a debt on a security, and it can be demonstrated that it was worth more than £140,000 when the mother died in 2019 when it probably was ascertained in the technical sense on the premise that the mother’s estate incurred an inheritance tax liability.’
The full article is available on the Taxation website.
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