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Post by darkky on Apr 7, 2016 16:26:30 GMT
Hello all, as the new tax year started yesterday, i decided to give the peer to peer lending platforms a try. However, there are a few things about the tax implications of these that i am not sure of and would like to clarify before actually investing.
Looking at the secondary market of one of the platforms (namely fundingsecure), there is a highlighted caution message:
"CAUTION: When buying a loan part you are purchasing the original loan. In line with HMRC rules you will therefore be responsible for any tax liability on all interest paid when the loan completes. As this can result in an overall loss, especially if the loan is repaid early, you should bear this in mind when purchasing on the secondary market"
This seems very strange (following this logic i could sell a loan part before the final payment and not own any tax), would someone clarify whether this is true? If yes, then does this apply to all types P2x platforms, e.g. secured loans like FS/SS, business like RebS/FC and personal loans like Zopa? Thanks
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ilmoro
Member of DD Central
'Wondering which of the bu***rs to blame, and watching for pigs on the wing.' - Pink Floyd
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Post by ilmoro on Apr 7, 2016 16:32:32 GMT
Hello all, as the new tax year started yesterday, i decided to give the peer to peer lending platforms a try. However, there are a few things about the tax implications of these that i am not sure of and would like to clarify before actually investing. Looking at the secondary market of one of the platforms (namely fundingsecure), there is a highlighted caution message: "CAUTION: When buying a loan part you are purchasing the original loan. In line with HMRC rules you will therefore be responsible for any tax liability on all interest paid when the loan completes. As this can result in an overall loss, especially if the loan is repaid early, you should bear this in mind when purchasing on the secondary market" This seems very strange (following this logic i could sell a loan part before the final payment and not own any tax), would someone clarify whether this is true? If yes, then does this apply to all types P2x platforms, e.g. secured loans like FS/SS, business like RebS/FC and personal loans like Zopa? Thanks Yes its true, see the two Secondary Market SM threads on the Funding Secure board for discussion of this. No it doesnt apply to all P2P becuase only FS SM operates in this way and pays interest at term. Most others either pay the interest to the seller at point of sale or next interest payment or when loan redeems. FS counts the payment of accrued interest to the seller as a capital gain not interest. p2pindependentforum.com/post/75870/threadp2pindependentforum.com/post/82379/thread
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Post by mrclondon on Apr 7, 2016 16:36:22 GMT
darkky No that message applies ONLY to Funding Secure
Two points to note:
Transactions on FS's SM are transfers of the original loan part from the buyer to the seller, where as most p2p platforms handle SM transactions as a redemption of the original loan part and the issuance of a new loan part to the buyer - and hence the interest accruels are split across the old and new loan parts and both the buyer and seller are responsible for the tax on the interest paid on their own loan part.
The structure of FS's SM may partly be as a result of FS loans never paying interest before they redeem or renew as a new loan (either by the borrower paying the cash or through FS selling the security). FS never retain interest from the drawn down loan. Transactions on the FS SM contain a mandatory capital premium to reflect the notional interest accrued upto the date of sale.
In theory all transactions on the FS SM should be at a discount to capital value to reflect that the tax liability on "interest" accrued upto the date of the sale is being transferred to the buyer of the loan part. So as a seller you would be selling both the accrued interest and its tax liability by offering the buyer a discount.
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james
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Post by james on Apr 7, 2016 16:50:14 GMT
It is not typical for all interest to be paid at maturity but it does happen on some platforms and for some loans on others. Income tax is due when the interest is paid so the overall treatment described would be correct for a loan that pays all interest at maturity when a seller is selling the right to all of that interest.
Even when interest is all paid at maturity it is not necessary for the buyer to bear all of the income tax burden. A buyer might instead give a seller a loan for the interest accrued so far that is repaid out of the interest when the interest is paid, with the right to that interest being retained instead of sold. But this is not how the platform you have mentioned has structured things.
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