ozaz
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Post by ozaz on Aug 9, 2018 19:33:44 GMT
Hello I'm confused as to how the rules for carrying forward bad debt relief interact with personal savings allowance. Let me give an example. Lets say in 17-18 tax year: * I have a £1000 personal savings allowance
* I earned £300 in cash savings interest and £900 in peer-to-peer interest (Total interest = £1200)
* I had £300 in irrecoverable peer-to-peer bad debt
Can I use £200 of the bad debt for tax relief in 17-18 (subtracted from the peer-to-peer interest) and hold back £100 to use in a future year? Or am I obliged to subtract the whole amount of the bad debt from the peer to peer interest since the bad debt is less than the peer to peer interest? The following passage ( taken from SAIM 12140 here) suggests the latter to me. However this guidance document makes no mention of how personal allowances interact with bad debt relief, which is what's causing my uncertainty. |
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pikestaff
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Post by pikestaff on Aug 9, 2018 20:28:56 GMT
Hello I'm confused as to how the rules for carrying forward bad debt relief interact with personal savings allowance. Let me give an example. Lets say in 17-18 tax year: * I have a £1000 personal savings allowance
* I earned £300 in cash savings interest and £900 in peer-to-peer interest (Total interest = £1200)
* I had £300 in irrecoverable peer-to-peer bad debt
Can I use £200 of the bad debt for tax relief in 17-18 (subtracted from the peer-to-peer interest) and hold back £100 to use in a future year? Or am I obliged to subtract the whole amount of the bad debt from the peer to peer interest since the bad debt is less than the peer to peer interest? The following passage ( taken from SAIM 12140 here) suggests the latter to me. However this guidance document makes no mention of how personal allowances interact with bad debt relief, which is what's causing my uncertainty. You have to deduct it in full, unfortunately. It's part of the calculation of your net income.
The personal savings allowance comes later. It's part of the calculation of how much tax you pay on your net income.
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ozaz
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Post by ozaz on Aug 10, 2018 9:24:26 GMT
Thank you
So is it a general principle that tax relief is always subtracted prior to consideration of personal allowances?
(this is the first time I'm having to consider paying tax on top of what I pay through PAYE so learning as I go)
In the case of tax relief for bad debt does this mean you can end up paying more tax over a period of multiple years?
In the example above I would claim £300 relief reducing interest to £900 which is below the PSA so no tax to pay in 17-18. But in a future year if the full £300 loan was recovered (unlikely, but possible I suppose) I would have to treat that as income so could end up paying £60 (£300*0.2). Or am I misunderstanding how interest on future recoveries would be applied?
If I'm not misunderstanding, in my mind it would be fairer if you could use the PSA first and then apply relief to any interest over the PSA. Then I would only need to use £200 of the potential £300 relief. If the loan was recovered in a future year I would presumably then only have to treat £200 of it as income limiting the possible future tax to £40 (£200*0.2) which is what I would have paid for 17-18 if I had not claimed the relief.
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bigfoot12
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Post by bigfoot12 on Aug 10, 2018 13:19:14 GMT
...it would be fairer if... could probably be used with most other sections of HMRC text... To be fair to the HMRC there will always be 'edge' case like the one you describe no matter how the rules are drawn up. In some ways it could be suggested that we are lucky that they let us claim the bad debts early in the process.
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ozaz
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Post by ozaz on Aug 10, 2018 13:54:51 GMT
Fair enough.
But is my understanding of the potential downside actually correct or am I misunderstanding something?
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bigfoot12
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Post by bigfoot12 on Aug 10, 2018 14:35:35 GMT
As far as I can tell your description seems accurate.
However you are not forced to use the tax credit. For example, if you are sure that the default will in fact pay back in full, and either you are likely to have used all your other tax allowances, or will pay tax at a higher rate in the future it might be worth not claiming the tax relief in the case you describe.
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pikestaff
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Post by pikestaff on Aug 11, 2018 6:58:09 GMT
As far as I can tell your description seems accurate. However you are not forced to use the tax credit. For example, if you are sure that the default will in fact pay back in full, and either you are likely to have used all your other tax allowances, or will pay tax at a higher rate in the future it might be worth not claiming the tax relief in the case you describe. To be strictly accurate, there is no discretion about whether when to use the tax credit (ie you must use it as soon as possible) but there is some room for interpretation of the rules on whether there is a tax credit in the first place.
In your example, the argument has to be that the conditions for loss relief are not met, and therefore there is no tax credit. In my view this is very likely to be the case for secured property loans, see p2pindependentforum.com/post/218979/thread.
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bigfoot12
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Post by bigfoot12 on Aug 12, 2018 16:31:07 GMT
As far as I can tell your description seems accurate. However you are not forced to use the tax credit. For example, if you are sure that the default will in fact pay back in full, and either you are likely to have used all your other tax allowances, or will pay tax at a higher rate in the future it might be worth not claiming the tax relief in the case you describe. To be strictly accurate, there is no discretion about whether to use the tax credit but there is some room for interpretation of the rules on whether there is a tax credit in the first place.
In your example, the argument has to be that the conditions for loss relief are not met, and therefore there is no tax credit. In my view this is very likely to be the case for secured property loans, see p2pindependentforum.com/post/218979/thread. From memory pikestaff you are an accountant (or possibly retired) so I bow to your better knowledge, but the Government's wording isn't helpful, see here, for example:- So can rather than must. What is the point of guidance notes if they increase ambiguity rather than reduce them! [For avoidance of any self created ambiguities I am cross with HMRC not pikestaff.]
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Post by GSV3MIaC on Aug 12, 2018 19:26:07 GMT
"Can" probably means hmrc won't object if you choose to ignore the loss and just pay tax on the rest. You "can" also claim deductions for charitable donations, and various other things .. there is no obligation ("must") to minimise your tax. "Must" is typically on the "pay up or else" side.
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pikestaff
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Post by pikestaff on Aug 13, 2018 7:24:03 GMT
To be strictly accurate, there is no discretion about whether to use the tax credit but there is some room for interpretation of the rules on whether there is a tax credit in the first place.
In your example, the argument has to be that the conditions for loss relief are not met, and therefore there is no tax credit. In my view this is very likely to be the case for secured property loans, see p2pindependentforum.com/post/218979/thread. From memory pikestaff you are an accountant (or possibly retired) so I bow to your better knowledge, but the Government's wording isn't helpful, see here, for example:- So can rather than must. What is the point of guidance notes if they increase ambiguity rather than reduce them! [For avoidance of any self created ambiguities I am cross with HMRC not pikestaff.] OK. I should have said "when", rather than "whether", the point being that if you claim relief you must claim it as soon as possible. I've amended the post accordingly.
That is what the law requires and it is also made clear in the guidance (SAIM 12140):
"The Lender can claim relief on peer to peer (P2P) loans that became irrecoverable on or after 6 April 2015, against interest received from loans made through P2P platforms in the 4 years following the year in which the debt became irrecoverable.
This relief can only be claimed if the loss resulting from the irrecoverable loan cannot be used wholly against interest received through P2P platforms in the same year as the loan is treated as becoming irrecoverable.
If carried forward, relief for the outstanding amount of the irrecoverable loan must be used against P2P interest received in the earliest year first, up to a maximum of 4 years."
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Post by bracknellboy on Aug 13, 2018 7:47:11 GMT
Interesting thread: I hadn't even realised the option to carry forward losses was there. And sadly, I can foresee that might be a requirement in the foreseeable.
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ozaz
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Post by ozaz on Aug 13, 2018 12:06:41 GMT
To be strictly accurate, there is no discretion about whether when to use the tax credit (ie you must use it as soon as possible) but there is some room for interpretation of the rules on whether there is a tax credit in the first place.
In your example, the argument has to be that the conditions for loss relief are not met, and therefore there is no tax credit. In my view this is very likely to be the case for secured property loans, see p2pindependentforum.com/post/218979/thread. Lets say you are in a situation slightly different to the opening post (the only difference being this time total interest does not exceed PSA) * £1000 personal savings allowance * £300 in cash savings interest and £700 in peer-to-peer interest (Total interest = £1000) * £300 in irrecoverable peer-to-peer bad debt Am I right in thinking in this situation there would be no point in immediately claiming relief on the bad debt because * The PSA already prevents any tax from being due * If the bad debt gets recovered in a future year you would be liable to pay income tax on the recovery if you had claimed relief on it * There is still the potential to claim relief in a future year if you are able to convince HMRC in a future year that the platform was premature in marking the debt as irrecoverable
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bigfoot12
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Post by bigfoot12 on Aug 13, 2018 12:34:24 GMT
To be strictly accurate, there is no discretion about whether when to use the tax credit (ie you must use it as soon as possible) but there is some room for interpretation of the rules on whether there is a tax credit in the first place.
In your example, the argument has to be that the conditions for loss relief are not met, and therefore there is no tax credit. In my view this is very likely to be the case for secured property loans, see p2pindependentforum.com/post/218979/thread. * There is still the potential to claim relief in a future year if you are able to convince HMRC in a future year that the platform was premature in marking the debt as irrecoverable To be clear my suggestion was to forgo the relief forever. And even without the final point in your post, above, that would seem to be the right thing to do.
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Post by GentlemansFamilyFinances on Aug 13, 2018 13:17:32 GMT
Forgoing the bad debt relief might be the best option as you could get trapped in a cycle of continual reinvestment into poorly performing P2P loans which lose you money but gain you relief. To gain the relief you loan more money which creates more bad debt when gives you more relief...... At least with 4 years to claim the relief you don't have to rush to recoup losses in the next tax year. But this is definitely a case of the tax tail wagging the investment dog.
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pikestaff
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Post by pikestaff on Aug 13, 2018 17:06:11 GMT
To be strictly accurate, there is no discretion about whether when to use the tax credit (ie you must use it as soon as possible) but there is some room for interpretation of the rules on whether there is a tax credit in the first place.
In your example, the argument has to be that the conditions for loss relief are not met, and therefore there is no tax credit. In my view this is very likely to be the case for secured property loans, see p2pindependentforum.com/post/218979/thread. Lets say you are in a situation slightly different to the opening post (the only difference being this time total interest does not exceed PSA) * £1000 personal savings allowance * £300 in cash savings interest and £700 in peer-to-peer interest (Total interest = £1000) * £300 in irrecoverable peer-to-peer bad debt Am I right in thinking in this situation there would be no point in immediately claiming relief on the bad debt because * The PSA already prevents any tax from being due * If the bad debt gets recovered in a future year you would be liable to pay income tax on the recovery if you had claimed relief on it * There is still the potential to claim relief in a future year if you are able to convince HMRC in a future year that the platform was premature in marking the debt as irrecoverable Agreed, provided that in your last point "irrecoverable" has the extended meaning given to it by HMRC for this purpose. It is in the interpretation of that extended meaning that there is room for argument. But I'd not depart from the platform's position, and risk provoking HMRC, unless I was pretty sure of my ground. I'd also want to be consistent from year to year.
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