By The Chipkie Team, Personal Finance Editorial Team · Last updated 5 October 2026
A relative has stopped repaying, and you wonder whether the unpaid balance can reduce your tax. Family loan bad debt relief in the UK is limited: section 253 concerns qualifying loans used for a borrower’s trade. An ordinary loan for personal spending does not qualify under that provision.
Start with what the money funded, then review recovery prospects and the claim conditions. A missed instalment, a closed business and a voluntary gift are different events. Keep the repayment problem and the tax assessment connected by clear evidence.
Key Takeaways
- Section 253 relief has trading-use requirements; a personal family loan does not qualify merely because it is unpaid.
- The lender must establish irrecoverability, including realistic future recovery prospects.
- Eligible relief is a capital loss for qualifying principal, rather than a refund of the debt.
- Unpaid interest is excluded, and special restrictions can affect related parties and released loans.
- Later recoveries after relief can create a capital gains consequence.
Which family loans can qualify for section 253 relief?
A family loan can potentially qualify when money was lent wholly for the borrower’s trade, or to set up a trade that subsequently began. Personal household borrowing falls outside that trading-use requirement. Confirm the actual borrower, use of funds and other statutory conditions before treating the unpaid balance as an eligible loss.
- HMRC’s qualifying-loan guidance excludes money-lending trades and includes professions and vocations.
- It also sets date conditions: loans must have been made on or after 12 April 1978; loans before 24 January 2019 retain a borrower UK-residence requirement.
| Hypothetical arrangement | What the records show | Initial section 253 assessment |
|---|---|---|
| £6,000 lent for a relative’s personal car | £1,000 repaid; £5,000 remains | Personal use does not meet the trading-use requirement |
| £15,000 lent to a child’s sole trade | £12,000 spent on trading stock and £3,000 on business equipment; trade commenced | Trading use may fit; remaining conditions still need checking |
| Money advanced for a proposed shop | The shop never commenced trading | Planning a business alone does not satisfy the start-up condition |
These are eligibility illustrations, not approved claims. Do not rewrite a personal loan as business funding after repayment becomes difficult. Preserve the original agreement, transfers, invoices and records showing what actually happened.
Our family loan start-up funding guide helps frame the original funding conversation. Tax relief still needs its own assessment.
How do you show the loan became irrecoverable?
Show why there was no reasonable prospect of recovering the relevant loan amount at the date claimed. Consider current resources and realistic future resources, rather than relying only on a missed payment or weak balance sheet. Preserve the facts supporting the conclusion, including explanations of any continuing business activity or possible recoveries.
- HMRC’s irrecoverability guidance does not equate a temporary inability to pay with an irrecoverable loan.
- Continued trading can indicate recovery prospects; even a ceased trade does not resolve the question if future repayment remains realistic.
| Evidence item | Practical reason to keep it |
|---|---|
| Payment ledger and bank references | Identify principal still outstanding without counting scheduled payments as receipts. |
| Dated correspondence | Record repayment requests, responses and proposed arrangements. |
| Business or insolvency records | Support the position with information beyond a family member’s description. |
| Assets, security and expected distributions | Explain whether a recovery remains possible. |
| Adviser’s assessment | Connect the evidence to the chosen amount and date. |
Keep uncertainties visible. For example, “awaiting the insolvency practitioner’s distribution estimate” is more useful than marking the balance as zero before that information arrives. Update the file if the recovery outlook changes.
What does an eligible capital-loss claim actually cover?
An eligible claim concerns qualifying principal that became irrecoverable, not the lender’s entire statement balance. Unpaid interest is excluded. The lender claims an allowable capital loss under section 253; this does not mean HMRC refunds the missing loan or automatically deducts the amount from ordinary income.
HMRC’s claim guidance identifies the lender as claimant and distinguishes principal from interest. Ask an adviser to confirm the claim procedure, relevant date and interaction with your capital gains position.
Hypothetical balance example: assume the qualifying £15,000 trading loan above received £4,000 of principal repayments. The remaining principal is £11,000. A separate £400 of unpaid interest brings the contractual amount owed to £11,400.
- Original principal: £15,000.
- Confirmed principal repayments: £4,000.
- Remaining principal: £11,000.
- Interest owed separately: £400.
- If all claim conditions are met and that principal is irrecoverable, the principal amount considered is £11,000, not £11,400.
The example assumes eligibility and irrecoverability have been established. It does not calculate a tax saving. An allowable capital loss and a cash reimbursement are different results.
What should you prepare before deciding to claim?
Prepare a file connecting the original loan, qualifying use, repayment history, outstanding principal and recovery evidence. Then check the restrictions and any proposed release with a tax adviser. A well-organised record helps assess eligibility without treating every unpaid family balance as a loss that can be claimed.
- HMRC’s other claim conditions address assigned loans, amounts taken into account for Income Tax, lender-caused irrecoverability and certain relationships.
- Loans between spouses or civil partners living together are excluded; ordinary parent-child lending is not excluded solely because the parties are related.
- Identify the parties. Confirm who advanced the money and who borrowed it, including whether a company is involved.
- Trace the original use. Connect transfers to invoices and the actual commencement or operation of the trade.
- Reconcile principal. Separate repayments, interest, extra advances and any earlier adjustments.
- Explain the recovery position. Include dated evidence and outstanding enquiries.
- Review changes before signing. Discuss a waiver, settlement, assignment or exchange for shares before assuming it has no tax effect.
Copyable review note: “Loan reference: [reference]. Original advance: [amount and date]. Borrower and trade: [details]. Evidence of use: [references]. Principal repaid: [amount]. Principal outstanding: [amount]. Recovery evidence and date: [details]. Eligibility questions for adviser: [list].”
A family loan tracker can organise the cash history. The record supports the assessment; it does not determine the tax result.
Can I claim only part of an outstanding loan?
HMRC generally expects the outstanding loan to be wholly irrecoverable before relief, because apparent recovery of part can suggest prospects for the rest. Its guidance allows limited partial claims in specified insolvency circumstances involving an announced distribution and no further expected dividends. Obtain advice rather than choosing an arbitrary percentage.
See HMRC’s partial-claim guidance before relying on an estimated shortfall.
Can unpaid interest be added to the claim?
No. Section 253 claim guidance excludes interest from the qualifying principal loss. Keep interest arrears in the contractual ledger, but separate them from the principal amount considered for relief. Calling interest part of the balance does not change that distinction; ask about any unusual capitalisation before preparing the claim.
Does forgiving the loan automatically prevent relief?
Not necessarily. HMRC distinguishes a loan that was already irrecoverable before a later waiver from one made irrecoverable by the lender’s own action or arrangements. A voluntary release does not establish eligibility, and its sequence matters. Seek advice before forgiving the debt or relying on a later release to support relief.
What happens if money is recovered after relief?
A later recovery after section 253 relief can create a deemed capital gain. Keep the earlier claim and subsequent receipt linked, including any recovery made in money or another form. Tell your adviser about the recovery rather than treating it simply as an ordinary repayment with no further tax consequence.
HMRC’s subsequent-recovery guidance explains the capital gains treatment. Preserve the actual amount, date and terms of any later recovery.
What is the most useful next step?
First decide whether the original loan meets the trading-use requirement, then assemble the principal and recovery evidence. Take that file to an adviser before claiming or releasing the debt. Clear records help you ask a focused eligibility question and avoid building a tax expectation around an ordinary unpaid household loan.
Create a written family loan agreement with Chipkie and keep repayment records clear.
Disclaimer: The information provided in this article is for informational purposes only and should not be considered financial or legal advice. Property and lending laws in the United Kingdom vary and may change over time. We always recommend consulting with a qualified solicitor and mortgage broker before entering into a property purchase or financial arrangement with another party.
