Deeply discounted securities

Yes, so the original owner would have to declare the gain to HMRC. It's the fairest way in one particular case that I am looking at. (It's five years so potentially a tax nightmare for a late buyer).

We'd show an AER as always so that bit at least would be clear

Thanks - I'll take a foray to Wellesley.

For UK tax purposes, a P2P loan can only be a deep discounted security if it meets the tax definition of a "security" (which is largely a matter of case law).

The consensus seems to be that regular P2P loans are "simple debts" and not "securities".  This is explicitly stated to be the case in FC's tax guidance and is assumed in HMRC's consultation on relief for losses.

Where P2P loans are simple debts, interest income for individuals is taxed on a cash basis and so the entire tax liability would fall on the eventual recipent of the interest. 

However, corporates are always taxed on an accruals basis.  On the face of it, this creates a tax planning opportunity.  If an individual sold the loan to a corporate shortly before maturity the individual would escape all liability for income tax (and if he was the original holder of the debt he would not be taxed on a capital gain either), while the corporate would be taxed on only on the small amount of interest accruing after its purchase.

I am not suggesting that you pick up and run with this particular ball, because (morality aside) I don't think the consensus view is wholly robust.  It might well be challenged if HMRC were minded to do so, and I will come back to this later.

If HMRC were to decide that P2P loans in general were securities, two arguably undesirable consequences would follow:
- interest on all P2P loans would be taxed effectively on an accruals basis, which would require lenders to make adjustments for tax purposes whenever they make sales or purchases "cum interest" (which happens on some but not all platforms today)
- under current law, I think there would be no loss relief at all (even as a capital loss) on loans to companies because the loans would (I think) be CGT-exempt qualifying corporate bonds.

If you wanted to be certain that the loan was a security, I think you would need to both (a) include something like a Spens clause (google it) to deal with early repayment and (b) ensure that is capable of being bought and sold at a profit. 

You might struggle with (b).  I believe the present consensus (that regular P2P loans are not securities) relies in part on the widespread (but not universal) practice of structuring secondary markets so that a "sale" is not actually a sale but a redemption funded by the issue of new debt.  Hence they are not (in strict legal form) bought or sold at a profit (even on on those markets which permit a premium to be paid).  I seem to recall seeing somewhere that this is the case on ablrate.

My personal view is that this analysis relies too much on  "form over substance".  I think HMRC accepts the legal fiction because it is convenient for all concerned to stick to the simplicity of treating P2P loans as simple debts.  But if this led to significant tax leakage they might change their position, with consequences for everybody.

Edit:  Crossed with bigfoot12 's contribution, which reminded me that the answer is blindingly obvious.  If SM "sales" are structured as redemptions as on FC, the accrued interest is paid in cash to the seller and is therefore taxed as income of the seller.  No tax planning issues arise.  So forget the above (though there are other platforms where it may be more relevant).

Thanks guys. Sorry... I am reading but can't "over-comment" for obvious reasons Just getting a feeling for what people think.