Secondary Market - Why so complicated?

I'm glad I wasn't the only one struggling with this, but much clearer now.

I've been registered with Ablrate for around 6 months but only just started investing because I struggled understanding the SM - all systems go now

arbster I shall as usual state that I cannot give tax advice but, as stated, the seller receives the interest up to the point of sale. I have to admit that I need to look into how we report interest earned for the buyer as it hadn't been raised before. My initial thought is "Hmmmm there are a lot of things up for interpretation here!" so it needs some exploration.


jonah Ablrate doesn't buy the interest out... the buyer of the loan pays the seller directly. We don't have a problem with multiple parts. Every loan on our platform is a single, fully and immediately fungible loan.

In terms of the risk transfer, accrued interest is calculated daily and not corrected in any way for risk. Looking at it the other way, I personally would say that buying the day before an interest payment carries MORE risk because you are paying virtually the full amount up front and relying on it being paid the next day. Nobody gets "free" interest at any point - you either own the loan and are accruing the rights to an interest payment or you have sold it and have no further rights.

Naturally - no one here is an advisor.

For my part, the key thing is that the site provides the necessary information to all parties to ensure they can make an accurate declaration of their tax affairs.  For my part, if I were the buyer I would plan to offset the interest paid to the seller against the interest ABLrate eventually pays to me on that loan part, prior to calculating my tax liability.  For me to be able to do that you need to present me with the relevant data in such a way that I can identify the interest paid, separately from the capital and any premium, unless that premium were being paid to the seller as interest.  In the event that the premium is being paid to the seller as interest (thus resulting in a taxable charge) it's a little questionable as to whether I should be able to offset the interest+premium, or just the equivalent interest for the rate I'm now receiving.

This whole area might be a bit of a minefield, especially where a taxpayer is selling a loan part to his non-taxpaying spouse at a premium, whereby excess interest might be "generated", offsetting other interest earned by the taxpayer.  I wonder if james has a view on this, as he's usually very well-informed on the topic of tax legislation.

I think I've worked out my confusion... Tha 'Abl pays the buyer the full interest' part was being misread in my head. most of my questions followed that misinterpretation.

My only follow on is around the implied tax statement arbster was talking about generating manually.... Can I safely assume this is on the to do list as I can't find it on the site ?

thanks

I have a view but I don't know whether it complies with tax law.

It seems cleanest in likely tax treatment to have the accrued interest portion of the purchase price be just a capital payment, so it is nor reportable as interest at all for the seller. The buyer is then liable for the income tax on the whole interest payment when it is received.

I don't see how to make the payment of money from buyer to seller interest in the way it is done now. It's not interest even though it's calculated as pro-rated interest amount and it's payable regardless of whether the borrower pays the money or not.

I dislike this view because it seems more sensible to have the tax cost split between buyer and seller, in part to avoid a desire on the part of buyers to buy as soon after a payment is made by a borrower as possible.

To address this concern a possible approach may be:

1. At purchase time the buyer pays the seller an amount in lieu of interest as part of the purchase cost.
2. When the borrower pays, the seller is paid pro-rated interest and repays the buyer the amount that was paid in lieu.
3. In case of default the buyer may never be reimbursed the payment made to the seller. The sale transaction transferred all risk and future income rights to the buyer from the seller and this seems necessary to handle that.

Ablrate would report:

A. non-interest payment in lieu to the seller
B at interest payment time, deduct the payment in lieu money from seller and pay it to buyer, pay the same amount of the interest from the borrower to the seller so the seller gets the taxable interest and its obligation

I think that this would be legal and produce the desired tax and other responsibilities but I'm no tax expert.

Interest is taxable when PAID, not accrued. In this case the buyer is taxable on the whole month's interest even though some of it relates to a period prior to purchase.

However as expected with HMRC nothing is so simple. HMRC have an Accrued Income Scheme for the transfer of qualifying securities such as bonds and gilts. This has the effect of tax being calculated on an accruals basis. Obviously HMRC will be keen for both seller and buyer to follow the same basis. I guess Ablrate need to say whether it considers its loans to be securities as defined.

www.hmrc.gov.uk/manuals/saimmanual/saim4000.htm

I haven't used the secondary market yet but these sort of tax issues (still waiting for Ablrate's view on the tax treatment of instant returns) plus the lack of Excel download are no incentive for me to start.

arbster

"On the subject of interest only being taxable on payment, the question is whether the settlement by the buyer of the interest accrued on the loan at the point of sale is considered to be interest paid to the seller."

It is not considered interest from a tax perspective and therefore is not taxable as interest.

www.hmrc.gov.uk/manuals/saimmanual/SAIM2450.htm

www.hmrc.gov.uk/manuals/saimmanual/SAIM2500.htm

The element of the accrued interest paid by the buyer would be regarded as part of the overall premium/discount on sale (assuming it is outside the Accrued Interest Scheme).