Lendy 'distressed' loans & loss relief

Agree with both the above with regard to Income Tax, but I think this latest query by wotnot relates specifically to CGT, so does that colour the situation differently?


And this is for individuals as opposed to businesses.  Businesses should be seeking professional advice as part of their wider activities.  Individuals ought really seek professional advice if the sums are significant enough. If insignificant, my preference is to wait until losses are crystallised and deal with them in that year.  That's just my preference and knowing your options is certainly no bad thing.

Thanks. Yes, it does.

SAIM 12210 seems fairly unambiguous on this so I am going to work on the basis that P2P losses cannot (for an individual, at least) be offset against capital gains unless I see/hear anything to the contrary.

I think that is right as SAIM 12210 specifically states that after 6 April 2016 "An irrecoverable loan that would have been eligible for capital gains relief as a capital loss under
TCGA 1992 will no longer be eligible for that relief." in the context of an individual lender.

Assuming you are claiming as an indlvidual and not a business (for which the rules are completely different), then, subject to certain exceptions, which I will assume for now do not apply, losses on qualifying p2p loans are eligible for relief against income.

If they are eligible for relief against income, they are not eligible for relief against capital gains.

The rules for claiming relief are set out in the relevant legislation, and interpreted in guidance issued by HMRC.  assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/597959/Income_tax_relief_for_irrecoverable_peer_to_peer_loans_FINAL_GUIDANCE__2_.pdf


For the avoidance of doubt, we are talking here about losses on p2p loans to borrowers, on a loan by loan basis.  Lendy's insolvency is irrelevant here unless and until it is determined that, as a result of some irregularity, your loans were not qualifying p2p loans at all.  AFAICS this is not being suggested at present.

So, the working assumption is that you can claim for losses on your p2p loans against income.  The debate is largely about timing, where neither the legislation nor HMRC's guidance thereon are especially clear.

I think that for pawnbroking loans you have to wait until the goods are sold and the outcome is known.  This is because there is no earlier enforcement action to point to.  [Not sure if Lendy has any of these but included for completeness.]

For property loans too, you could wait until the platform declares the losses.  If this is what you choose, just be patient and wait until you are told what they are. They will all be crystallised eventually. 

However, it seems to be broadly accepted (and HMRC in practice will accept) that claims can be made on an estimated basis as soon as enforcement action is taken against the borrowers [not against Lendy - their insolvency is irrelevant].  If you go down this route, you will need to claim on a consistent basis, be consistent from year to year, and keep workings to support your claims. Much of the thread is devoted to helping with this.  The administrators surely won't help with estimates - nor would many borrowers want to pay them to do so.

A complication is that there may (probably will) be administrators' costs to deduct from realisations.  I'm not at all sure how these should be dealt with for tax purposes.  It would be good if someone (perhaps the FRC) could persuade HMRC to opine on this in due course. 

Sorry for the omission.

You are right that any losses on model 1 loans will not be eligible for relief against income tax.

As to whether they will be eligible for relief as capital losses for CGT purposes, that's a whole new can of worms.  I'm not a tax specialist but I think the answer for individual taxpayers is no.  The analysis is complicated but is summarised below.

For tax purposes, a loan to Lendy could be one of three things:

1. A security that is a qualifying corporate bond.
2. A security that is not a qualifying corporate bond
3. A simple debt.

There is a brief but superficial discussion in HMRC helpsheet 296 www.gov.uk/government/publications/debts-and-capital-gains-tax-hs296-self-assessment-helpsheet/hs296-debts-and-capital-gains-tax-2016.  You need to dig deeper to get anywhere useful.

The definition of a security is open to interpretation.  HMRC's internal guidance on the point (starting at www.hmrc.gov.uk/manuals/cgmanual/CG53420.htm) is based on an important tax avoidance case (the Ramsay case), in the course of which the Lords decided that a particular loan was a security rather than a simple debt.

To quote the guidance (CG53425):

“Both speeches in the House of Lords emphasised that for a debt to be the debt on a security it should be capable of being
- held as an investment; and
- realised at a profit.
These conditions are, to some extent, interrelated, but it is important that both should be satisfied. For example, a debt may be regarded as a good investment. But if it cannot be realised at a profit it cannot be a debt on a security.”

On the latter point, the Revenue guidance goes on to consider the implications of a debt being repayable at short notice (CG53429):

“You cannot say that a debt is not a debt on a security simply because it can be repaid at short notice. But it is reasonable to suggest that in such cases there should be some compensation for the creditor to counterbalance the uncertainty as to the term of the loan. For example, a penalty can turn an otherwise uncertain, and therefore inherently unattractive, loan into a worthwhile investment. If a loan can be repaid at short notice, but there is no compensating benefit for the creditor, this would count against accepting the loan as a debts on a security.” [emphasis added]

In the light of this guidance, the conventional wisdom has been that a p2b loan repayable on demand without penalty is not a security, but a simple debt.  This view is implicitly supported by the drafting of HMRC's guidance on the interaction of peer to peer tax relief with Capital Gains Tax (SAIM 12210).

If you accept this reasoning, loans to Lendy will be simple debts.  Simple debts are eligible for CGT loss relief, for the original lender, only if they are loans to traders, which meet certain conditions.  The first condition is that "the money lent is used by the borrower wholly for the purposes of a trade carried on by him, not being a trade which consists of or includes the lending of money".  Since Lendy's trade obviously included the lending of money, the loans do not qualify for the relief.

Buyers of second-hand "simple debts" may also be eligible for CGT loss relief, without having to meet these conditions.  I don't know whether or not Lendy operated, or purported to operate, a secondary market in model 1 loans.  If it did, it will be necessary to determine whether "buyers" on that market were truly buying second-hand loans.  That will be a question of fact, but it seems unlikely to me.  I suspect that they will have been making new loans, which Lendy used to repay the "sellers".  If I'm right, then "buyers" of model 1 loans on the secondary market will not get loss relief either.

The final point to consider is what if the loans to Lendy are/were securities, notwithstanding the conventional wisdom to the contrary.  In that case, I think that they will be qualifying corporate bonds (QCBs), the key part of the definition being:

"... For the purposes of this section, a [qualifying] "corporate bond" is a security...
(a) the debt on which represents and has at all times represented a normal commercial loan; and
(b) which is expressed in sterling and in respect of which no provision is made for conversion into, or redemption in, a currency other than sterling ..."

For individuals, QCBs are exempt from CGT and no loss relief is available.

Indeed so. 

On the assumption that the debts were simple debts, you would have got loss relief for new loans if they were loans to (qualifying) traders.  You would not have got loss relief on new loans to people other than traders, or non-qualifying traders. 

Among other things, the trader could not have a trade including the lending of money. So, "lend to lend" (which the FCA has now stopped for other reasons) was never a good idea from a tax point of view.  Lendy Model 1 loans are "lend to lend".