Loans at a discount on the (After)Market

The other thing to note that may confuse is that the buy and sell instructions specify amounts as if the discount wasn't applied.  Ie. if you have a buy instruction for £1,000 for par value or better and you happen to have some loan units available at a 10% discount then you will spend £1,000 to buy £1,111.11 of loan units.  Likewise if you sell £1,000 loan units at 10% discount it will actually sell £1,111.11 of loan units to raise £1,000 of cash for you.

I'm reviewing this with my fellow directors today.  0.01% discounts are a bit over the top and just allow sellers to circumvent the allocation algorithms by trying to out do other lenders by the tiniest of fractions.  This can also mean bypassing the underwriters and QAA when they're trying to sell down a loan without actually having to offer anything beyond the tiniest of discounts.

1% was chosen to make sure that lenders offering a discount have to overcome that hurdle to do so, rather than just play with bypassing the algorithms as a matter of routine.  We're thinking of allowing 0.5% and possibly even 0.25% but no promises on that yet.

See your point on discounting beyond 50%, will discuss that as well and most likely will change it.

We've discussed the discounts and it's been decided that the current options will remain.  Discounts aren't provided so that lenders can idly jump the queue or circumvent the balancing / prioritisation algorithms that have been put in place to keep the market balanced for the benefit of all lenders.

A 1% discount, which as pointed out represents something in the region of 1 month of interest on average, is about right for someone looking for a speedy exit from an otherwise good loan.  It's a hurdle but not an overly onerous one which is why we chose that level in the first place.  Distressed loans have the option for higher discounts being offered.

It should also be remembered that we don't charge lenders any fees for exiting a loan, such as a sale fee or even a fee based on breaching the amount of time you'd agreed to lend the funds.  Such fees can greatly affect the cost to lenders.

We'll keep this under review but for now the existing figures will remain in place.

When we enable it.  Think I mentioned before it was disabled for now and would be enabled in a couple of weeks.  Want to let everyone get used to it first before we add that layer of confusion.

Just noticed that someone has put a discount of 1% on £70.92 For the Expat Lend to Let Loan#172, any takers?

I can't see that now, so I'd guess there was a taker.  Unless, of course, the seller changed their mind.

Has anyone seen any other discounted parts?  I haven't, but I haven't looked everywhere.

The difference betwen the puchase price and the selling price is a capital gain. My understanding is that second-hand loan parts are within the scope of CGT and therefore the gain will be taxable, subject to the annual exemption for capital gains which for 2015/16 is £11,100.

This assumes that sales and purchases on AC are in fact sales and purchases. On FC (I believe) they are not. Instead the "purchaser" subscribes for a new loan part which the borrower uses to redeem the loan part of the "seller". At least, that's my interpretation of the FC guidance here: support.fundingcircle.com/entries/22557912-What-are-the-tax-consequences-of-lending-as-an-individual- (scroll down to the 3rd bullet of "Taxation on sales of loan parts for a premium or discount").  If AC use a structure similar to FC then the second-hand loan part will be outside the scope of CGT and the gain will be tax free.

Does MRC's seller have a 56p capital loss to account for?  How will this all interact with the upcoming ability to use 'bad debts' to offset P2P interest income?  If a loan is headed for a loss -- such as Plumber -- would a lender be better off selling at a discount or holding on until the loss is 'official'?

I think it might be helpful if AC could tell us whether their intermediation model for a trade on the secondary market is a novation/re-assignment (so that the selling lender A steps-out and is replaced by the stepping-in lender B) or a tear-up (so that lender A's contract with the borrower is torn-up and a new contract is created between lender B and the borrower, such that lender A never sells to lender B).

FC's interpretation seems to be that it is a tear-up and that new loans are being formed. Since these loans are being treated as simple debts rather than securities, any profits arising on the maturity or disposal of a loan should not be liable to tax. However, if a new loan is being formed, then if lender B pays 99 for a par security from lender A, then one has to interpret the 1% difference surely as an unwind fee paid by lender A to lender B? I am not totally clear why that still isn't taxable. I'm sure FC has taken legal counsel on this and is correct but I never find these things comfortable.