nick
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Post by nick on Nov 25, 2015 19:44:14 GMT
Re taxing of all full interest amount received by new owner - my first instinct is that the interest payments are caught by the Accrued Interest Scheme under which the value of the acquired loan is deemed to consist of the clean value plus accrued interest with the two elements being used to subsequent chargeable capital and chargeable interest. The scheme was originally set-up to address this specific issue and to tackle manipulation of capital and income. However, having reviewed HMRC's helpsheet on the matter (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/323803/hs343.pdf) its not clear whether FS loans are captured by the legislation whose focus is primarily on bonds, loan notes and other similar securities. The term securities generally implies instruments traded on a public exchange which FS obviously isn't.
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nick
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Post by nick on Nov 25, 2015 20:35:34 GMT
'fraid so. Essentially ALL parts should be trading at a DISCOUNT to reflect the tax due on the accrued interest. (I'll have a play with a spreadsheet later to see if I can deduce what fair value is for the various tax bands and how far through the loan the transaction occurs. ) Predictably most parts are being listed at a premium even though the 12%/13% yield is barely enough to compensate for capital losses. The one part I listed at par got snapped up in seconds. I've listed a few others at various premiums to see what the tolerance level is, and will drop them to par in due course. Ultimately I think the FCA will have to provide guidance on the operation of secondary markets to avoid SM purchasers being ripped off - a 5% premium on a loan lasting 31 (more) days yielding 1% per month or a guaranteed 4% loss (even before the tax on accrued interest) is just asking for regulatatory intervention. So this is due to FS not paying monthly interest but at the end of the term (6 months) The seller then realizes a capital gain and liable for capital gains tax rather than an income tax, as they never received income (interest), just bought and sold an asset. I think FS did not account for capital gains tax in their statement above "Because of the above anyone selling at par (0%) actually gains a small (tax) advantage". I DON'T think they receive a tax advantage, they pay capital gains tax rather than income tax on the accrued interest. However, surely the buyer is only liable for income tax on the interest paid over the remaining term, as they have bought the asset at a specific price and have only accrued income (interest) from the asset in the remaining term. I don't think FS is correct when they state "When any loan completes (whether purchased at the start of the loan or through the secondary market) the investor receives interest.
When you download the tax figures for the year from our site the interest earned will reflect only the interest earned when a loan is completed."
The interest statement should only include interest the buyer actually accrues, not interest that has already been paid for in the price of the asset As FS was founded by an accountant, you would hope they would be able to provide accurate advice on this Re capital gains tax - its worth noting that simple debts are not chargeable assets in the hands of the original lender. A debt may become a chargeable asset if disposed by someone other than the original owner. FC get round this by novating contacts, ie the old contract is replaced by a new contract between new lender and original borrower and it FC state that their opinion that gains and losses on sale of loan parts are not subject to CGT or any other tax. Link to relevant guidance for those interested: www.gov.uk/government/publications/debts-and-capital-gains-tax-hs296-self-assessment-helpsheet/hs296-debts-and-capital-gains-tax-2015
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Investboy
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Post by Investboy on Nov 25, 2015 20:46:37 GMT
A secondary market is a fine idea for those who need to liquidate their holdings in a hurry, not for use as a vehicle to further increase profit from fixed interest rate loans. Premiums have no place here in my view. Yes , people listing loans yielding 8% with 5% premium is PURE JOKE
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Investboy
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Post by Investboy on Nov 25, 2015 20:52:59 GMT
I may have found potential bug. Bought a 225.00 part in 2804795379 (Hampshire Land). But I already had investment there. My current holding did not increase by purchased amount nor I have another entry in Active Investments Purchased few other parts, all new to me, and they appeared fine Also I can see this purchase in my transactions - last in the list. Are you sure your purchased part is not listed separately? Ignore above, my mistake. I bought 2 parts today, that are on the list under one cumulative entry. Nice. Lets sort out the tax issue.
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Investboy
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Post by Investboy on Nov 25, 2015 21:05:30 GMT
fundingsecure - I like the search feature. Looks like it is searching all available fields: id, title, available, days remaining, interest. But I can't make it work with the premium field as percent sign is ignored. I'd like to also be able to quickly filter on premium (0%). When I type just a number I get all results with that number in any field.
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mikes1531
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Post by mikes1531 on Nov 25, 2015 21:58:46 GMT
Can I confirm that when listing a loan for sale, the interest still accrues until the loan is sold and does not cease to accrue when a part is put up for sale (like SS)? Does the interest stop accruing in SS? Interest at SS does stop accruing as soon as a loan part is put up for sale. That's why lenders are better off listing parts for sale early in the day. Not that that's an issue at SS these days, because parts seem to be selling pretty much instantly.
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webwiz
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Post by webwiz on Nov 25, 2015 22:01:08 GMT
IMO FS have not thought this through. I assume that interest continues to be paid on loans on the SM (unlike SS). So there is no incentive for anybody to remove a loan from the SM (I am not even sure whether it is possible to do so). People will soon catch on that almost any premium makes the loan a bad buy. So the SM will be cluttered up with unsellable loans and it will be almost impossible to sell a loan even at a discount as nobody could find it (you can't sort on the premium/discount field) Edit: now fixed - ignore previous sentence
There are various possible fixes:
1) Stop paying interest on loans on the SM, like SS. This will not be popular.
2) Introduce a limit on the premium that can be requested based on the age and rate of the loan. This could be complicated.
3) My preference - ditch the premium/discount feature. Loans are sold at par. Edit: I like Jonah's idea in the next post better - you can sell at par or a discount but not at a premium.
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jonah
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Post by jonah on Nov 25, 2015 22:17:53 GMT
With 250+ offers at a premium but nothing at par or discounted, this looks similar to the early days of band E on FC. The tax implications aside, FS should be congratulated on the concept, ease of use etc. However, given the speed most loans already sell at, I suspect that 'buy as much as you can and sell for immediate profit' bot farming may become popular here.
One simple solution would be to remove premium sales. I suspect the market would be a lot quieter but still have a lot of buyers, as folk like myself who would be interested but have challenges being online at the right time.
The tax issues just need to be clearer.
A solid B+ I think.
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Post by Financial Thing on Nov 25, 2015 23:44:55 GMT
If what McLondon says is true, then on every platform you purchase a loan piece, you will be responsible for the tax in the same way as on FS. Unless a certain platform has a special way of handling loan pieces on its statement.
I also agree with ditching premiums. This will make the SM liquidity much better.
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Post by mrclondon on Nov 26, 2015 0:03:16 GMT
If what McLondon says is true, then on every platform you purchase a loan piece, you will be responsible for the tax in the same way as on FS. Unless a certain platform has a special way of handling loan pieces on its statement. No only applies to platforms where the seller is purchasing accrued interest along with the capital. Any rationally thought out secondary market (take a bow AC & SS) would pay accrued interest upto the time of the sale (however that time is defined) to the seller when the next interest distribution is made. This is not a new problem, but is dramatically worsened by the fact FS loans are rollup interest not monthly.
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jimc99
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Post by jimc99 on Nov 26, 2015 6:02:15 GMT
I would like to see a "Yield to Maturity" column in the secondary market listings so all potential investors know better what their return will be. See Mintos SM for how they do it.
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stevio
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Post by stevio on Nov 26, 2015 6:33:04 GMT
I don't think the interest does accrue with FS whilst on sale:
Selling:
You are able to sell all or part of any loan that you have invested in, in multiples of £25. Active loans can be sold up until 30 days before the expected end date.
The price is set by the seller, as follows:
• Capital
• Premium / Discount (Optional)
• Accrued interest at point of sale
Buying:
You are able to buy all or part of any loan being offered for sale, regardless of whether you already have any additonal investments in the loan.
You must have sufficient available funds in your account to make a purchase. Once you have confirmed the purchase the loan (or part loan) will be transferred to your account, together with any interest accrued to-date. It will then continue to accrue interest until the loan is completed.
This sounds like the seller receives accrued interest up to the point of sale and the buyer receives the interest accrued up to the point of purchase?
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SteveT
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Post by SteveT on Nov 26, 2015 7:51:46 GMT
I would like to see a "Yield to Maturity" column in the secondary market listings so all potential investors know better what their return will be. See Mintos SM for how they do it. I completely agree. Adding a "Yield to Maturity" (or AER) column will illustrate all too clearly that buying an FS loan at even 1% premium (even with 180 days to run) is poor value. Buying anything at 2% premium is a joke. The option to sell out at a discount will be useful when someone wants an early exit. However providing the option to sell a 6 month loan at a premium is pretty pointless (see the 25 pages of dud offers listed already!). At the very most, premiums should be 0.1% to 1% in 0.1% increments.
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arbster
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Post by arbster on Nov 26, 2015 8:02:38 GMT
I don't think the interest does accrue with FS whilst on sale: Selling:
You are able to sell all or part of any loan that you have invested in, in multiples of £25. Active loans can be sold up until 30 days before the expected end date.
The price is set by the seller, as follows:
• Capital
• Premium / Discount (Optional)
• Accrued interest at point of sale
Buying:
You are able to buy all or part of any loan being offered for sale, regardless of whether you already have any additonal investments in the loan.
You must have sufficient available funds in your account to make a purchase. Once you have confirmed the purchase the loan (or part loan) will be transferred to your account, together with any interest accrued to-date. It will then continue to accrue interest until the loan is completed.
This sounds like the seller receives accrued interest up to the point of sale and the buyer receives the interest accrued up to the point of purchase? I had interpreted "sale" as the point at which the exchange of parts takes place, therefore being coincident with "purchase". Not many shops would define the point of sale as the time they put the stock on the shelves.
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stevio
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Post by stevio on Nov 26, 2015 8:11:05 GMT
I don't think the interest does accrue with FS whilst on sale: Selling:
You are able to sell all or part of any loan that you have invested in, in multiples of £25. Active loans can be sold up until 30 days before the expected end date.
The price is set by the seller, as follows:
• Capital
• Premium / Discount (Optional)
• Accrued interest at point of sale
Buying:
You are able to buy all or part of any loan being offered for sale, regardless of whether you already have any additonal investments in the loan.
You must have sufficient available funds in your account to make a purchase. Once you have confirmed the purchase the loan (or part loan) will be transferred to your account, together with any interest accrued to-date. It will then continue to accrue interest until the loan is completed.
This sounds like the seller receives accrued interest up to the point of sale and the buyer receives the interest accrued up to the point of purchase? I had interpreted "sale" as the point at which the exchange of parts takes place, therefore being coincident with "purchase". Not many shops would define the point of sale as the time they put the stock on the shelves. But they refer to this as setting the price, surely you can't set a price for sale if you don't know the accrued interest to add, which makes me think it is the accrued interest till put up for sale? With your analogue, the shops price the item prior to a sale, the sale might come some time after, the price does not change based on when the sale takes place ie they can't charge more to someone because it took a week to sell compared to someone buying immediately
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