mikes1531
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Post by mikes1531 on Dec 18, 2015 20:36:26 GMT
One more thing to bear in mind before making a purchase on the SM - the effect of early redemptions . My finger was poised yesterday to buy (at par) a loan part with 90 days until maturity to sell on as 30 days approached. Then sanity prevailed - if I had done so, and the loan had redeemed early I would have been left with the tax liability of the purchasd accrued interest. Conclusion - there are no circumstances where I'll buy a part at par (or a premium). AIUI, there's another disincentive to doing what mrclondon was planning to do... loan parts bought on the SM and later sold on the SM are not considered 'simple debts' and therefore any change in value -- i.e. if the premium/discount on the sale is different from that on the purchase -- is a capital event and thus subject to CGT. The amounts may be small, and the tax involved minimal -- or possibly even negative, as I'd expect sales to be at a lower premium than purchases -- but there's a record keeping burden that has to be shouldered and possibly, if there's enough activity, another tax return form to complete. So my only SM activities are going to be sales, though I could be sorely tempted if parts are offered at a discount. Has anyone spotted any discounted part on the SM?
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ablender
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Post by ablender on Dec 18, 2015 21:00:39 GMT
One more thing to bear in mind before making a purchase on the SM - the effect of early redemptions . My finger was poised yesterday to buy (at par) a loan part with 90 days until maturity to sell on as 30 days approached. Then sanity prevailed - if I had done so, and the loan had redeemed early I would have been left with the tax liability of the purchasd accrued interest. Conclusion - there are no circumstances where I'll buy a part at par (or a premium). AIUI, there's another disincentive to doing what mrclondon was planning to do... loan parts bought on the SM and later sold on the SM are not considered 'simple debts' and therefore any change in value -- i.e. if the premium/discount on the sale is different from that on the purchase -- is a capital event and thus subject to CGT. The amounts may be small, and the tax involved minimal -- or possibly even negative, as I'd expect sales to be at a lower premium than purchases -- but there's a record keeping burden that has to be shouldered and possibly, if there's enough activity, another tax return form to complete. So my only SM activities are going to be sales, though I could be sorely tempted if parts are offered at a discount. Has anyone spotted any discounted part on the SM? What would happen to the SM if everyone aims to sell and no one is ready to buy?
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Post by eascogo on Dec 18, 2015 21:44:29 GMT
True could be pretty nasty if you got one that had gone half way through the loan so you had to pay the interest up to then and then they repaid the loan the next day could end up losing quite a bit I've just been caught out like that  As a non-tax-payer, I wasn't worried about paying a slight premium for a loan with some time left to run. I was happy with the indicated AER, so went ahead and purchased. I'd only accrued interest for a few days when it repaid early and I lost money. Fortunately, I am only using small sums in FS compared to other platforms, but that's not the point. fundingsecure , why couldn't you have implemented a Secondary Market like Saving Stream or Money Thing? With all the feedback you've been given here, it is disappointing that you have neither made big improvements nor justified why you consider your way better. As other forumites have said, it is a waste of time (and in this case, money as well) purchasing on the SM with the current set-up. Very disappointing. I note the many complaints about the unfairness of the SM setup but despite the flaws I confess that I like the way it functions. You might grudgingly agree that the SM has added much life to the platform. It gives lenders welcome liquidity, helps latecomers (slow fingers), is attractive to flippers, and FS in turn benefits from the greater appeal of the platform. Flippers with a kind heart or a conscience can, if they wish, sell early at a low premium or at par so benefits are mostly handed over, but they should also tolerate lenders with a more mercantile mindset. P2P is not pure altruism, it is also business. To be fair, FS has responded to comments and made some effort towards warning SM buyers of the risks. It has flagged the effective rate and removed loans when this dropped below 4%. Their cautionary note is a step in the right direction: "purchasing an investment at a high premium, especially with a small number of days remaining, may result in the buyer getting less than their outlay when the loan completes and interest is returned." But it could go further and include mention of possible early redemption and also spell out that tax on the whole interest will attach to the last owner. It would of course be much better for interest to be distributed equitably but the difficulty would be how to deal with loans bought and sold repeatedly. Would this not be a bookkeeper's nightmare? How do other platform handle this?
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mikes1531
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Post by mikes1531 on Dec 18, 2015 23:12:14 GMT
What would happen to the SM if everyone aims to sell and no one is ready to buy? The SM would become used mainly by people who need to exit their loans before maturity, and they'd probably have to sell at a discount in order to compensate buyers for the extra income tax they'll have to pay. Which seems more reasonable and fair than the current system whereby flippers take some of the benefit by selling at a premium and/or escape paying tax on their earnings by selling parts that are a few months old. There would still be some people who would use the SM to rapidly increase or diversify their portfolios, and as long they understand the tax implications, that's a reasonable use of the SM, especially if some parts are offered for sale at a discount. To be fair, FS has responded to comments and made some effort towards warning SM buyers of the risks. It has flagged the effective rate and removed loans when this dropped below 4%. Their cautionary note is a step in the right direction: "purchasing an investment at a high premium, especially with a small number of days remaining, may result in the buyer getting less than their outlay when the loan completes and interest is returned." But it could go further and include mention of possible early redemption and also spell out that tax on the whole interest will attach to the last owner.
It would of course be much better for interest to be distributed equitably but the difficulty would be how to deal with loans bought and sold repeatedly. Would this not be a bookkeeper's nightmare? How do other platform handle this?
To deal with the last question first... the same way SS and AC do -- with sophisticated a IT system. Once the system is designed correctly it should run without any extra burden on the platform. But it would take an effort to create in the first place. And FS may be too small an operation to be able to afford such an effort without affecting its operation negatively. The system as it is would be OK as long as everyone using it understood it completely. IMHO, however, I think it's unlikely that they do, and that's where FS could find themselves exposed -- and us being exposed to collateral damage. FS have put some warnings on the website, but they may not be adequate. The one quoted by eascogo, for instance, refers to parts bought at "a high premium", but the tax situation could mean buyers ending up with "less than their outlay" when buying parts at par -- or even below par. Does everyone fully understand the warnings? If not, then some people will get burnt, complain to the regulators, and the powers that be could decide FS didn't do enough to inform/educate their users and that punitive corrective action is required. The bad PR that would cause would not do FS any good at all.
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ben
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Post by ben on Dec 19, 2015 0:34:58 GMT
MT secondary market seems to be the best out of all of them and I would have thought it was easiest for the platform to implement
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SteveT
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Post by SteveT on Dec 19, 2015 10:14:02 GMT
Has anyone succeeded in precisely replicating the FS calculation for "Effective rate" that's shown against the SM loanpart listings? The obvious calculation (based on days remaining x % rate, minus premium charged, converted back to % yield assuming 365 days per year) seems to give me slightly higher % rates than indicated by FS.
However if I deduct 3.5 days from the "Days left" figure before calculating interest remaining then I get very close to the FS figures (that doesn't make a lot of sense though!). I wonder if the difference could be down to FS using an IRR formula, but there shouldn't really be any compounding issues given all interest is paid at the end of the loan.
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ben
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Post by ben on Dec 19, 2015 10:49:11 GMT
Has anyone succeeded in precisely replicating the FS calculation for "Effective rate" that's shown against the SM loanpart listings? The obvious calculation (based on days remaining x % rate, minus premium charged, converted back to % yield assuming 365 days per year) seems to give me slightly higher % rates than indicated by FS. However if I deduct 3.5 days from the "Days left" figure before calculating interest remaining then I get very close to the FS figures (that doesn't make a lot of sense though!). I wonder if the difference could be down to FS using an IRR formula, but there shouldn't really be any compounding issues given all interest is paid at the end of the loan. I think they just throw random numbers at it and hope for the best
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mikes1531
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Post by mikes1531 on Dec 19, 2015 21:08:24 GMT
Has anyone succeeded in precisely replicating the FS calculation for "Effective rate" that's shown against the SM loanpart listings? The obvious calculation (based on days remaining x % rate, minus premium charged, converted back to % yield assuming 365 days per year) seems to give me slightly higher % rates than indicated by FS. However if I deduct 3.5 days from the "Days left" figure before calculating interest remaining then I get very close to the FS figures (that doesn't make a lot of sense though!). I wonder if the difference could be down to FS using an IRR formula, but there shouldn't really be any compounding issues given all interest is paid at the end of the loan. : You've probably already included this, but just in case you didn't... Did you remember to use the price including accrued interest and any premium in the denominator of your calculation? I think there's a rounding effect/issue as well. If I offer both a £25 part and a £50 part for sale, the system doesn't always come up with the exact same effective rate. I've not tried any calculations, but I've presumed that's because the accrued interest at the time of offer/sale has to be rounded to a whole penny. There's a similar issue with the interest to be paid at maturity, but I don't know whether the rounded number or the exact number goes into the effective rate calculation. Depending on exactly how FS do the calculations, the relevant amounts for the £50 part might not be exactly double those for the £25 part. On a related point, I don't know exactly how FS deal with the rounding of the interest paid at maturity. Do they always round up? Do they always round down? Do they always round to the nearest penny?
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mikes1531
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Post by mikes1531 on Dec 19, 2015 22:06:20 GMT
Has anyone succeeded in precisely replicating the FS calculation for "Effective rate" that's shown against the SM loanpart listings? The obvious calculation (based on days remaining x % rate, minus premium charged, converted back to % yield assuming 365 days per year) seems to give me slightly higher % rates than indicated by FS. I've not tried any calculations... : I've tried a calculation now, and came up the the same number that FS do. The part I used was £200 of 2804795379 that's for sale now for £209.40 (with no premium). It's a 12% loan, so ought to be worth £212 at maturity in 40 days. Net gain for the seller therefore would be £2.60. And that (£2.60/£209.40) is a gain of 1.24164%. Over 40 days, that's 0.03104%/day. And multiplying that by 365, that's 11.3296%/year. The effective rate FS show for that loan part is 11.33%. Q.E.D. (But you might wish to try this process on another part and see whether it works consistently -- or if I just got lucky!  )
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SteveT
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Post by SteveT on Dec 19, 2015 23:39:16 GMT
Thanks. Error identified now (logic OK but formula was picking up the wrong cell)
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Post by solicitorious on Dec 20, 2015 10:02:24 GMT
fundingsecureSurely changing the +/- from a list box to a spin button in 0.1% increments isn't going to tax your techies too much? At the moment the choice seems to be either sell at par (or at a discount) or list at some silly premium pointlessly, on the offchance some numpty buys it. The SM is definitely in need of fine-tuning....
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mikes1531
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Post by mikes1531 on Dec 20, 2015 20:24:53 GMT
Either there are a lot of non-taxpayers or a lot of numpties about, as there seem to be buyers for loan parts with just 40 days to run. OK, maybe they're not numpties. Maybe they're just blissfully unaware of the tax situation as described by FS. Or they don't believe it. Or they've asked advice their tax advisers and have been told that they won't have to pay tax on all the interest they receive at maturity.
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ben
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Post by ben on Dec 20, 2015 21:07:07 GMT
To be fair, FS has responded to comments and made some effort towards warning SM buyers of the risks. It has flagged the effective rate and removed loans when this dropped below 4%. Their cautionary note is a step in the right direction: "purchasing an investment at a high premium, especially with a small number of days remaining, may result in the buyer getting less than their outlay when the loan completes and interest is returned." But it could go further and include mention of possible early redemption and also spell out that tax on the whole interest will attach to the last owner.
It would of course be much better for interest to be distributed equitably but the difficulty would be how to deal with loans bought and sold repeatedly. Would this not be a bookkeeper's nightmare? How do other platform handle this?
To deal with the last question first... the same way SS and AC do -- with sophisticated a IT system. Once the system is designed correctly it should run without any extra burden on the platform. But it would take an effort to create in the first place. And FS may be too small an operation to be able to afford such an effort without affecting its operation negatively. With regards to the question surely a system like MT is easy no premium/discount to calculate, work out the interest for the day and assign it to the person owning the loan at end of that day, no need for complicated programme having to track premium/discount and no need for people to potentially lose out with tax or if a loan repays early.
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Post by Financial Thing on Dec 21, 2015 16:44:39 GMT
Either there are a lot of non-taxpayers or a lot of numpties about, as there seem to be buyers for loan parts with just 40 days to run. OK, maybe they're not numpties. Maybe they're just blissfully unaware of the tax situation as described by FS. Or they don't believe it. Or they've asked advice their tax advisers and have been told that they won't have to pay tax on all the interest they receive at maturity. I think they are unaware and to be honest, I would have been also if I didn't lurk the forum.
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kaya
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Post by kaya on Dec 21, 2015 20:17:30 GMT
Although in favour of 0.1 increments at first, perhaps this would be just a bit too cluttered. The beauty of the set-up as it is, is its simplicity, and loans with 1% premiums do sell, or sometimes anyway. However, I would suggest changing it to 0.5% increments, and see how that goes.
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