CG53500 | Securities: debts: general points: payments under guarantee

Lenders commonly require guarantees over money they are lending. For example, a bank may agree to make a loan to a company, B Ltd, provided that the debt is guaranteed by C Ltd. If B Ltd is unable to repay the debt, the bank may ask C Ltd to pay instead. If C Ltd pays the bank under the guarantee it will, under general law, take over the bank's rights to B Ltd's debt.

The right to the debt is an asset within TCGA92/S21 (1), but on normal capital gains principles no allowable loss will accrue to the guarantor, C Ltd, on a subsequent disposal of the debt. This follows from the case of Cleveleys Investment Trust Co v CIR (No.2), 51TC26, where it was held that in these circumstances the main object of the payment by the guarantor was to meet its obligation under the terms of the guarantee it had given. The acquisition from the bank of the right over the debt was merely incidental. Thus, the payment to the bank was not money given `wholly and exclusively' for the acquisition of the debt. It cannot, therefore, be deducted in computing any gain on any subsequent disposal, see CG15150+.

TCGA92/S253

Although there can be no allowance for any resulting loss on normal capital gains principles, payments under guarantees may give rise to allowable losses under the specific provisions of TCGA92/S253, see CG65900C. Where relief has been given under these sections, any sums subsequently received by the guarantor in respect of the debt will be subject to a recovery charge, so that the relief is restricted to the net amount paid out by the guarantor.