j1
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Post by j1 on Feb 3, 2018 14:16:36 GMT
I am a 40% tax payer. I don't fully understand the discount system.
To offset tax what is the maximum discount that a loan can be sold for when selling at 45 days before the end of a loan?
Can someone please help with with the calculations?
Thanks!
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r00lish67
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Post by r00lish67 on Feb 3, 2018 14:58:07 GMT
I am a 40% tax payer. I don't fully understand the discount system. To offset tax what is the maximum discount that a loan can be sold for when selling at 45 days before the end of a loan? Can someone please help with with the calculations? Thanks! I'll assume that you've either already used up or don't want to use the FS ISA, which would get around this entirely. I won't attempt a formula, but just an illustration. Let's assume you have 12% loan part. You will accrue roughly 1% per month interest (slightly less, but stick with me). So if you hold for 4.5 months as in your example, you'll earn nearly 4.5% gross. If you were to pay 40% tax at that point, 4.5 *0.4 = 1.8% of that percentage point return would go to the taxman. Meanwhile you'd earn 2.7% net. In reality, FS loans don't realise interest at the 45 day point unless they happen to complete early, but just to illustrate the point. If you instead were to sell off to someone on the SM at the maximum permitted discount of 1%, then you'll earn 4.5% - 1.0% = 3.5%, but as a capital gain. *So, assuming you remain below the capital gains threshold and don't attract tax that way either, then I think the answer is that the maximum discount is 1%, and that's only because the SM limits you to that. If the SM allowed it, you could still mostly do better by selling at greater discounts than 1% (unless it's a very low interest rate loan). It also explains why in the pre-ISA and pre-SM limit days we often had discounts in excess of 1%, even for attractive loans. Meanwhile, as only a few loans currently require a 1% discount to sell (take a look), then I think the pragmatic approach here for the higher rate tax payer is just to sell out at a slightly increased discount than is available on the SM at present until your loan parts clear. Hope that helps, and I look forward to any shonky maths/logic in the above being appropriately torn into  Edit: * as solicitorious points out below, unless the loan part you sell was purchased from the SM itself, it wouldn't be a capital gain liable for tax either according to FS.
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blender
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Post by blender on Feb 3, 2018 16:00:34 GMT
I am a 40% tax payer. I don't fully understand the discount system. To offset tax what is the maximum discount that a loan can be sold for when selling at 45 days before the end of a loan? Can someone please help with with the calculations? Thanks! I'll assume that you've either already used up or don't want to use the FS ISA, which would get around this entirely. I won't attempt a formula, but just an illustration. Let's assume you have 12% loan part. You will accrue roughly 1% per month interest (slightly less, but stick with me). So if you hold for 4.5 months as in your example, you'll earn nearly 4.5% gross. If you were to pay 40% tax at that point, 4.5 *0.4 = 1.8% of that percentage point return would go to the taxman. Meanwhile you'd earn 2.7% net. In reality, FS loans don't realise interest at the 45 day point unless they happen to complete early, but just to illustrate the point. If you instead were to sell off to someone on the SM at the maximum permitted discount of 1%, then you'll earn 4.5% - 1.0% = 3.5%, but as a capital gain. So, assuming you remain below the capital gains threshold and don't attract tax that way either, then I think the answer is that the maximum discount is 1%, and that's only because the SM limits you to that. If the SM allowed it, you could still mostly do better by selling at greater discounts than 1% (unless it's a very low interest rate loan). It also explains why in the pre-ISA and pre-SM limit days we often had discounts in excess of 1%, even for attractive loans. Meanwhile, as only a few loans currently require a 1% discount to sell (take a look), then I think the pragmatic approach here for the higher rate tax payer is just to sell out at a slightly increased discount than is available on the SM at present until your loan parts clear. Hope that helps, and I look forward to any shonky maths/logic in the above being appropriately torn into That's where I gave up. Wot? Sure you are right but I can't get my head round the idea of doing better by selling at a larger discount. You have helped me to avoid an FS account for longer.
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Post by solicitorious on Feb 3, 2018 16:05:46 GMT
AIUI, provided the loan part has been held from "new", it falls into that rare, rare category where the Taxman doesn't give a monkey's. So not a capital gain, either...
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r00lish67
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Post by r00lish67 on Feb 3, 2018 16:19:03 GMT
I'll assume that you've either already used up or don't want to use the FS ISA, which would get around this entirely. I won't attempt a formula, but just an illustration. Let's assume you have 12% loan part. You will accrue roughly 1% per month interest (slightly less, but stick with me). So if you hold for 4.5 months as in your example, you'll earn nearly 4.5% gross. If you were to pay 40% tax at that point, 4.5 *0.4 = 1.8% of that percentage point return would go to the taxman. Meanwhile you'd earn 2.7% net. In reality, FS loans don't realise interest at the 45 day point unless they happen to complete early, but just to illustrate the point. If you instead were to sell off to someone on the SM at the maximum permitted discount of 1%, then you'll earn 4.5% - 1.0% = 3.5%, but as a capital gain. So, assuming you remain below the capital gains threshold and don't attract tax that way either, then I think the answer is that the maximum discount is 1%, and that's only because the SM limits you to that. If the SM allowed it, you could still mostly do better by selling at greater discounts than 1% (unless it's a very low interest rate loan). It also explains why in the pre-ISA and pre-SM limit days we often had discounts in excess of 1%, even for attractive loans. Meanwhile, as only a few loans currently require a 1% discount to sell (take a look), then I think the pragmatic approach here for the higher rate tax payer is just to sell out at a slightly increased discount than is available on the SM at present until your loan parts clear. Hope that helps, and I look forward to any shonky maths/logic in the above being appropriately torn into That's where I gave up. Wot? Sure you are right but I can't get my head round the idea of doing better by selling at a larger discount. You have helped me to avoid an FS account for longer. Might be me explaining badly, but I just mean that you in theory sell at discounts in excess of 1% and still 'beat' the return you would achieve as a higher rate tax payer if you the investment was redeemed at exactly the same point. For example, if I had a £1000 loan part @ 12 % interest, by the 45 day remaining mark I'd have accrued approximately (£1000 *0.12)/12 *4.5 = £45 interest. If the loan redeemed early at exactly that point, I'd have to pay £45 *0.4 = £18 interest to the taxman, and I'd earn £27 net. If I instead managed to sell the loan at par on the SM, I'd earn £45 net. If I sold the loan at 1% discount then I'd earn £45 - (£1000*0.01) = £35 If I sold the loan at 1.5% discount then I'd earn £45 - (£1000*0.015) = £30. So, it's quite possible to beat higher rate tax payer returns by selling even at a 1.5% discount (not that that's currently possible). Re: solicitorious 's point on not incurring CGT, it appears you're entirely right, I'm wrong. From the FS site: "CAPITAL GAINS TAX Secondary market transactions are considered to be purchases / sales of the original loan which is a “simple debt”. As such they are not usually liable for capital gains tax. In the event of a capital loss due to a default the loss is calculated against the original capital value, not including any premium / discount paid through the secondary market. The current capital gains annual exempt allowance for an individual is £11,100. NOTE: If you buy and then resell the same loan part on the secondary market it may no longer be considered as a “simple debt” and any gains may be liable for capital gains tax. www.fundingsecure.com/invest-with-us/secondary-market
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Post by solicitorious on Feb 3, 2018 16:48:39 GMT
That's where I gave up. Wot? Sure you are right but I can't get my head round the idea of doing better by selling at a larger discount. You have helped me to avoid an FS account for longer. The formula is as follows:- MaxDiscount = -100 * YourTaxRate * LoanRate * DaysActive / 365 Worked example. YourTaxRate = 40% LoanRate = 13% DaysActive = 108 MaxDiscount = -100 * 0.4 * 0.13 * 108 / 365 MaxDiscount = -1.54% (the break-even discount) Therefore... if you can sell the loan for a lesser discount, you are ahead, and what is more, you will have de-risked your exposure to that loan.
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Godanubis
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Anubis is known as the god of death and is the oldest and most popular of ancient Egyptian deities.
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Post by Godanubis on Feb 3, 2018 16:54:12 GMT
Hi I have spread sheet that might help It makes for interesting reading. This is for 20% reasonably easy to understand goes from -0.1% to -1% jan-time to sell FSECURE.xlsx (11.77 KB) |
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j1
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Post by j1 on Feb 4, 2018 9:52:15 GMT
Thanks everyone, super helpful!
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Post by solicitorious on Feb 4, 2018 14:00:00 GMT
Conversely, to work out the notional Annual Rate (before tax) on a sale the formula is as follows:-
AnnualRate = 100 * (LoanRate + (Discount / 100 * 365 / DaysActive)) / (1 - YourTaxRate)
Worked example.
YourTaxRate = 40%
LoanRate = 13%
DaysActive = 103
Discount = -0.4% (for sale at a premium, this will be positive, of course)
AnnualRate = 100 * (0.13 + (-0.4 / 100 * 365 / 103)) / (1 - 0.4)
AnnualRate = 19.30% (notional, before tax)
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