When a personal guarantee has to be given in order to give a lender the security it needs, the guarantor hopes that the guarantee will never be called in. However, when it is, the loss suffered by the guarantor will normally qualify as a loss for Capital Gains Tax (CGT) purposes to be set against gains chargeable to CGT.

A recent case dealt with the question of when a loss under a guarantee arises for the purposes of obtaining relief against CGT. Is it when the guarantee becomes payable or when it is actually paid? It involved a man who had been assessed to CGT over two successive years (2009/10 and 2010/11) with a liability of a little over £8,000.

He had given a guarantee by way of a deposit of money into a bank for the borrowings of a company that failed during the property crash. Some years later, when he tried to access the money in 2012, this was refused and in the tax year 2012/13 the legal title to the money was passed across to the bank under the guarantee.

He claimed the sum paid under the guarantee as a loss for CGT purposes to be set against the tax payable in the two earlier tax years. CGT losses are not available to be set back against gains assessable in earlier years, but he argued that once he had placed the funds with the bank, he no longer had control over them. The bank could have enforced its guarantee in the earlier years, but did not. He argued that the fact that the bank waited until the 2012/13 tax year to enforce its guarantee formally did not mean that he had not lost the money until then, as it was inevitable that it would do so once the company foundered.

The case was further complicated by the fact that ill health had meant that the taxpayer had given scant attention to his financial affairs during the years concerned.

Regrettably for the taxpayer, the rules that apply for relief to be given in such cases set out several criteria, all of which must be met. One of these is that the payment under the guarantee has to have been made.

The taxpayer’s claim was refused.