pikestaff
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Post by pikestaff on Oct 18, 2014 7:01:30 GMT
I found the bit you missed out on the message more illuminating "Our initial thoughts are that the risk profile of peer to peer loans is very different from stocks and shares and it will be confusing to try to combine the two asset classes into a single type of ISA. For that reason it would be much better to establish a new type of ISA specifically for peer to peer lending. " So TC is trying to pretend that a third ISA is required because the investor will find it "confusing" if they are mixed with S&S. They must think their investor base is pretty stupid! Worryingly it should be fairly easy to convince the FCA of this since the FCA assumes all investors are stupid. In reality TC just want a captive capital base. They don't want to share that capital with units trusts/ETFs/ITs and don't want to share it with other P2P platforms. This is understandable as the more captive capital they have the more they can drive down yields and the more borrower deal flow they can generate, leading to bigger profits. From my perspective this would be a really bad outcome. We're finally getting rid of the illogical separation between cash and S&S ISAs and then we risk another arbitrary separation. Why should P2B loans be separate from S&S? The corporate bond fund I can buy in my S&S ISA is far closer in risk to a portfolio of P2B loans than to a cash deposit (though most P2B platforms don't want their "saver" to think that). Moreover, long-term this will totally kill off the possibility of seeing P2P/P2B investing added to the normal fund supermarket platforms. The ability to move ISA money easily between asset classes should be a priority for all investors but this will make it very hard to sell an S&P 500 fund to buy a P2B loan portfolio etc. I don't think you are right about TC's motives. I think they would be at least as happy marketing a fund product via institutions as they would be setting up a product for direct investment. If you read the consultation document (which you can get to via a link in the press release here www.gov.uk/government/news/government-sets-out-options-to-include-peer-to-peer-p2p-loans-in-isas) you will see that there are some genuine issues involved. My personal view is that few providers of S&S ISAs (and almost certainly not Hargreaves Lansdown) will want the cost and hassle of including p2p in their ISAs even if they are allowed to do so. Also, you say "we're finally getting rid of the illogical separation between cash and S&S ISAs". Only up to a point, I think. The consultation document is written as though that distinction remains. We are getting rid of the artificial barrier that prevents transfers of value between the different classes of ISA, but that's about it. I still expect people to go to a bank/bs for their cash ISA and to a broker for their S&S ISA although I'm sure there will be people offering bundled products for a (well-hidden) fee.
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pikestaff
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Post by pikestaff on Oct 18, 2014 7:32:33 GMT
That does not need legislation, it would be up to the platforms. Assuming you had £20k invested in P2P for 5 years. It might be straightforward for £15k to be swapped into the ISA product, or the platform might require the investment to be made as new money. There might even be some surprises, such as Zopa coming up with a new Lending Model for ISA's, or FC implementing a software change that actually works (Probably needs a miracle for that to happen). The words 'Tax Free' should give the stronger platforms a big boost. The smaller platforms would become less attractive - a sensible lender might not want to tie up a tax free allowance on a Provider with no lending opportunities. Transferring existing investments could be a real technical nightmare for some platforms, but it would in principle be just SM transaction with a restricted buyer, what would be nigh impossible is transferring your funds from one P2P ISA to another P2P ISA from a different provider should it contain non-tradeable loans or simple the mere fact that there was not the volume of cash circulating in the SM to cover the sale of the loans to facilitate the withdrawal of the cash to move it to another platform. Transferring existing investments into an ISA is not just a technical issue for the platforms. Stocks and shares cannot be transferred in directly, they have to go via the market in a "bed and ISA" transaction, to establish the market price. You sell to the market (not yourself) and buy back from the market. HMRC insists on this in order to get a proper cut-off for tax purposes. If transfers of existing p2p loans into an ISA are to be allowed, then a mechanism for this will have to be agreed with HMRC. I don't think HMRC will accept an SM transaction with a resticted buyer because this does not establish a true market value. Plus no SM is an efficient market at the moment; some SMs (such as AC) do not allow transfers at above par; and most SMs do not allow transfers of delinquent/defaulted loans. The danger is that HMRC might demand an independent valuation, which would be expensive. It would be better if there were regulations alllowing us to make transfers in at par value, but HMRC / the Treasury would need to be persuaded that this would not result in significant loss of revenue. The consultation document does not address these tax issues at all. Perhaps they are outside its scope but they need to be addressed. On transfers between platforms, the consultation document discusses the possibility of allowing the p2p ISA platforms to be the legal (but not beneficial) owner of the loans, which is what happens (indeed, is required) with S&S ISAs now. This would make it easier to transfer between platforms because your AC loans could be transferred to the legal ownership of the TC ISA platform (or vice versa) without you having to sell up. More work for the platforms, of course, and it would be up to them whether they allowed it.
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Post by geoffrey on Oct 18, 2014 8:45:19 GMT
Transferring existing investments into an ISA is not just a technical issue for the platforms. Stocks and shares cannot be transferred in directly, they have to go via the market in a "bed and ISA" transaction, to establish the market price. You sell to the market (not yourself) and buy back from the market. HMRC insists on this in order to get a proper cut-off for tax purposes. Isn't the main reason for bed and ISA the need to realize any capital gains (or losses) before putting a share into an ISA? Otherwise people could game the system by making capital gains disappear into an ISA and realizing losses outside of an ISA. I'm not sure this issue applies to P2P, and only capital losses (for CGT purposes) apply to P2B. The main issue, as I see it, would be establishing the cash value of the asset being transferred into the ISA in a consistent way across the different P2Ps. The simplest mechanism would be an accounting one rather than a market-based one: the cash value is equal to the remaining capital owed by the borrower on the day of transfer, with some kind of adjustment for accrued (unpaid) interest to that date. Loans in collections/default would probably need to be excluded, as the capital value is uncertain, and HMRC would lose out (compared to the current regime) if such loans could be transferred into an ISA. As long as a clear accounting standard can be established, whereby it is clear how much tax would be due on a loan on the day it enters the ISA, I do not see the need for a market-based valuation.
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pikestaff
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Post by pikestaff on Oct 18, 2014 14:16:04 GMT
Transferring existing investments into an ISA is not just a technical issue for the platforms. Stocks and shares cannot be transferred in directly, they have to go via the market in a "bed and ISA" transaction, to establish the market price. You sell to the market (not yourself) and buy back from the market. HMRC insists on this in order to get a proper cut-off for tax purposes. Isn't the main reason for bed and ISA the need to realize any capital gains (or losses) before putting a share into an ISA? Otherwise people could game the system by making capital gains disappear into an ISA and realizing losses outside of an ISA. I'm not sure this issue applies to P2P, and only capital losses (for CGT purposes) apply to P2B. The main issue, as I see it, would be establishing the cash value of the asset being transferred into the ISA in a consistent way across the different P2Ps. The simplest mechanism would be an accounting one rather than a market-based one: the cash value is equal to the remaining capital owed by the borrower on the day of transfer, with some kind of adjustment for accrued (unpaid) interest to that date. Loans in collections/default would probably need to be excluded, as the capital value is uncertain, and HMRC would lose out (compared to the current regime) if such loans could be transferred into an ISA. As long as a clear accounting standard can be established, whereby it is clear how much tax would be due on a loan on the day it enters the ISA, I do not see the need for a market-based valuation. I take it you are assuming that p2p/p2b loans are "simple debts" and thus gains and losses are not taxable/deductible, with the exception of capital losses on loans to traders, which are capital losses for CGT purposes. I believe all that to be true for the original lender, which might indeed (on the face of it) remove the need for a valuation provided that HMRC can capture accrued but unpaid interest on transfers in. However, my understanding is that second-hand p2p/p2b loan parts are subject to CGT on both gains and (with some exceptions) losses. In principle, therefore, I would expect HMRC to want these to be fully valued on a transfer in. FC claim that this issue does not arise for second-hand purchasers on FC: "Profits and losses arising on the disposal of loans where you are not the original investor would normally be taxable under the capital gains tax regime. However, due to the way that that “sales” are structured at Funding Circle, all loans, including replacement loans, are effectively treated as original loans for capital gains tax purposes. This means capital gains tax should not be payable on loan parts sold at a premium, and loss relief should not be available for loan parts sold at a discount." (see support.fundingcircle.com/entries/22557912-What-are-the-tax-consequences-of-lending-as-an-individual-). The details of how they achieve this are not disclosed, but I suspect it involves the purchaser making a "new" loan to fund the redemption of the "old" one. This seems a bit "form over substance" to me, and I don't know whether they have any kind of sign-off from HMRC. It is possible that other platforms may use a similar mechanism, but I am not specifically aware that they do. On some platforms, such as AC, the retail market is increasingly a second-hand market, buying from underwriters. As far as I can see, unless the platforms have a valid mechanism to avoid this, gains and losses on all these second-hand loan parts will be within the CGT net. I would also note that on platforms that are not true p2p, such as SS and Wellesley, the question of the CGT status of individuals' loans may be more complicated; I have not investigated this. If anyone out there has made a proper study of these issues I'd be interested to know.
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james
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Post by james on Oct 19, 2014 5:49:53 GMT
The most important parts of the consultation appear to be the proposals that: 1. All p2P firms regulated by the FCA or equivalent will automatically become eligible to be ISA managers for the loans on their own platform. 2. Other ISA managers will be required to be owners or co-owners of the loans made so that they can get full loan details to report to HMRC. Since there is no limit on the number of ISAs that can be simultaneously held with money from past years, part 1 seems extremely useful since it should keep overhead costs low, particularly compared to ISA platforms that might want to charge 0.5% a year for just holding the investment.
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james
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Post by james on Oct 19, 2014 6:56:14 GMT
Transferring your funds from one P2P ISA to another P2P ISA from a different provider would use the same process of that already existing for Cash ISAs. Please explain how it would be that simple. Unless loan parts can be transferred between platforms (can you really see AC taking on parts of loans from FC) then the loans parts in the P2P ISA would have to be converted to cash to make the transfer. You appear to be making it more complicated than it needs to be. There are two fairly simple cases and at least one more complicated case: 1. Third party ISA managers that are not P2P platforms could transfer all or part of the amount invested in one P2P platform to another ISA manager as an in-specie transfer, just as can happen to day for any other illiquid investment like a property fund that has suspended redemptions or a fund like CF Arch Cru that is in resolution and completely and permanently unsellable. 2. The P2P platforms themselves can be allowed to only allow cash transfers and can be allowed to just accept the current features of their platforms and let market forces cause the introduction of secondary markets when appropriate. This addresses all of the nasty valuation problems around sales, like trying to work out the correct value of a loan that is in IVA insolvency or held by a now-bankrupt borrower who still might voluntarily make payments. 3. The FCA can require that the resolution plans for failure of a P2P platform include use of a firm that is an ISA manager so that the loans do not automatically cease to be in an ISA if the P2P platform fails. Or HMRC could note historic precedents that have been used for cases like IceSave to allow money from a failed ISA manager to be reinvested with another ISA manager without counting against the annual ISA allowance. In the P2P context this would involve HMRC accepting reinvestment into another ISA wrapper based on annual statements of interest and capital return until runoff is complete.
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pikestaff
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Post by pikestaff on Oct 19, 2014 7:15:45 GMT
...Since there is no limit on the number of ISAs that can be simultaneously held with money from past years, part 1 seems extremely useful since it should keep overhead costs low, particularly compared to ISA platforms that might want to charge 0.5% a year for just holding the investment. What makes you think that the p2p platforms won't make a similar charge?
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surby
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Post by surby on Oct 19, 2014 9:56:28 GMT
...Since there is no limit on the number of ISAs that can be simultaneously held with money from past years, part 1 seems extremely useful since it should keep overhead costs low, particularly compared to ISA platforms that might want to charge 0.5% a year for just holding the investment. What makes you think that the p2p platforms won't make a similar charge? I also doubt that P2P ISAs will be free. The consultation document indicates a number of requirements that will have to be met by ISA providers and these will all have a cost. IMHO that cost should be allocated to those using the ISA and not paid by non-ISA investors.
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james
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Post by james on Oct 19, 2014 17:27:33 GMT
...Since there is no limit on the number of ISAs that can be simultaneously held with money from past years, part 1 seems extremely useful since it should keep overhead costs low, particularly compared to ISA platforms that might want to charge 0.5% a year for just holding the investment. What makes you think that the p2p platforms won't make a similar charge? A third party ISA manager gets no revenue from the lending activity and most or all are prohibited from receiving commission so they will need to make some charge, which may be their ordinary platform charge, whatever that is. The P2P platform does get revenue from lending. For the UK platforms I expect that quite quickly most lending will be inside an ISA, making it pointless to add an extra charge and the overhead associated with it. Some charge would be more reasonable for P2P platforms that cater extensively to non-UK investors, like Bondora where UK investors are less than 20% of amount lent. Even so I doubt that a charge as high as 0.5% would be appropriate. At the moment P2P platforms are competing with VCTs for my non-pension money. That's tough competition given the 30% rebate and tax free dividend income offered by VCTs.
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mikes1531
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Post by mikes1531 on Oct 20, 2014 2:59:24 GMT
We are getting rid of the artificial barrier that prevents transfers of value between the different classes of ISA, but that's about it. I still expect people to go to a bank/bs for their cash ISA and to a broker for their S&S ISA although I'm sure there will be people offering bundled products for a (well-hidden) fee. When cash ISAs were distinct from S&S ISAs, it was allowable to have a cash ISA from a bank or building society and also a S&S ISA from somebody else, both within the same tax year. Is that still possible with NISAs? Is all that has been done is to make the total invested in a given year divide-able between the two types of ISAs in any proportion as long as the total of the two is within the overall ISA limit?
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pikestaff
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Post by pikestaff on Oct 20, 2014 7:00:47 GMT
mikes1531 It will also be possible to transfer funds freely between the different types of ISA. The old rules allowed transfers from cash ISAs to S&S ISAs but not vice versa.
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pikestaff
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Post by pikestaff on Oct 20, 2014 7:33:26 GMT
What makes you think that the p2p platforms won't make a similar charge? A third party ISA manager gets no revenue from the lending activity and most or all are prohibited from receiving commission so they will need to make some charge, which may be their ordinary platform charge, whatever that is. The P2P platform does get revenue from lending. For the UK platforms I expect that quite quickly most lending will be inside an ISA, making it pointless to add an extra charge and the overhead associated with it. Some charge would be more reasonable for P2P platforms that cater extensively to non-UK investors, like Bondora where UK investors are less than 20% of amount lent. Even so I doubt that a charge as high as 0.5% would be appropriate. At the moment P2P platforms are competing with VCTs for my non-pension money. That's tough competition given the 30% rebate and tax free dividend income offered by VCTs. An ISA wrapper will increase the p2p platforms' costs and they will want to be paid. If they don't charge for the wrapper they will pay themselves through the spread between borrowers and lenders, which would be unfair on non-ISA investors. I would expect the platforms to want to make some profit from the activity as well. Perhaps 0.5% is a bit high but we shall see. I have some money in VCTs but they are riskier IMO and you are locked in for 5 years if you want to keep the relief. They will never be a mass market product as p2p aspires to be.
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james
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Post by james on Oct 20, 2014 18:23:00 GMT
I agree that the ISA wrapper has a cost. I think that the revenue gain from increased lending is likely to cover that cost. I doubt that it will take much of an increase to do that. That growth should help those not using the ISA wrapper by decreasing the overall platform overhead per loan.
If I didn't think that the ISA wrapper would be beneficial overall I'd probably agree with you.
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Post by batchoy on Oct 20, 2014 19:43:19 GMT
One of the things that I do hope happens is that P2P platforms will be level headed enough to block the transfer of existing ISA/NISA funds into P2P NISAs, restricting investments to the transfer of existing loan parts and new monies only. If they don't the influx of funds could be devastating to interest rates as people force them down in fight to the bottom as they attempt to at least get their funds earning something.
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spyrogyra
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Post by spyrogyra on Oct 20, 2014 20:39:05 GMT
There's a simple and fair solution to enable setting up and do free transfers from existing S&S,transferable or maturing Cash ISAs to a personally managed PISA. Imagine that when you log on to your personal bank account there's a button "PISA". By clicking it you'll be able to see the sort code/acc no of your PISA account. You can transfer in it cash up to £15k during the current tax year as well as instruct transfers to this account from existing S&S and other Cash Isas. Imagine there's a drop down menu with the names of all qualifying P2P platforms. You are allowed to move cash to various platforms. The references for these transfers would always start with PISA so that the platforms would recognize them easily. You would be able to transfer back funds from the platforms to your PISA account only. No funds no brokers no fees.
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