I will pay tax on money I lose
ET writes: I sold my half share in a business to my business partner at the start of 2010. The proceeds have been part paid to me already, with the balance to be paid over the next 12 months. I am therefore about to pay a large sum of tax on money I have yet to receive in full. The company, which provides my business partner with his income, is now struggling following the bad debt and loss of business from a customer. If the business goes under, I will not see the remainder of the proceeds owed to me. Can I pay tax on just the amounts received already or do I have to cover the whole amount due?
I have also lent my partner money to keep the business going. Should the business fail in the new year, can I reduce the tax I owe in lieu of the amount he is unable to repay me?
The capital gains tax (CGT) will eventually be limited to the gain you receive, but you may not get relief for a loss on the loan to your partner, writes Jon Sutcliffe, partner at Kingston Smith LLP. The general rule is that the full consideration, including future installments, must be brought into account in your tax return in the tax year of disposal. However, if the future consideration becomes irrecoverable, it is possible to make a claim and any tax paid in relation to the irrecoverable amount will be repaid or any tax due discharged. You will need to demonstrate to HMRC for a fact that the consideration has become irrecoverable.
If the loan to your old business partner becomes irrecoverable, you may be able to claim this as a capital loss that can be offset against your capital gains. However, these losses will only relieve gains in the same or future tax years, so will not affect the CGT on the gain from the sale of the business.
Where the proceeds are received in instalments over a period of at least 18 months, your CGT can be paid in instalments by agreement with HMRC. Based on the information provided, it is possible that some of the proceeds will be received after 18 months from the date of the disposal. If these proceeds are quantifiable, you may be able to agree with HMRC to pay the tax relating to that proportion of the proceeds in instalments.