littleoldlady
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Post by littleoldlady on Jun 12, 2016 11:02:22 GMT
I understood from posts some time ago that anyone buying on the SM would be liable for tax on the whole of the interest on the loan. Is that right? If so has anyone verified that from their own account? AFAICS the interest reported on my tax statement reflects only that from loans I bought at launch. None of the loans I bought on the SM repaid before 5th April so I assume that the interest will be reported in the tax year in which a loan is repaid. Did anyone have a loan bought on the SM which repaid last tax year? If so did their tax statement include the interest accruing before the purchase?
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Post by mrclondon on Jun 12, 2016 11:18:47 GMT
Yes to all your questions, and verified by my 2015-16 tax statement*.
Buyers of loan parts at launch receive the interest when the borrower pays it at redemption, and is added to the tax statement as per date of redemption (or asset recovery)
Buyers of loan parts on SM pay the seller a mandatory capital premium equivalent to the accrued interest. Buyers of loan parts on the SM receive the interest for the whole term when the borrower pays it at redemption, and the interest for the whole term is added to the tax statement as per date of redemption (or asset recovery).
Sellers of loan parts on the SM receive a mandatory capital premium equivalent to the accrued interest. FS loans are classed as "simple debts" and no capital gains tax applies as this mandatory premium is considered an incentive to purchase, however care is needed if a loan part is bought and sold on the SM if you are close to the annual capital gains tax allowance.
p2p platforms report to HMRC interest / cashbacks etc that are liable to income tax, and do not report capital gains/losses.
Your question "Is this right ?" could be interpreted a couple of ways. If you mean are FS applying HMRC rules correctly, then the answer is IMO yes for "simple debts".
EDIT:
* My 2015-16 tax statement total for interest matches my spreadsheet to the penny, and is driven by the online statement entries that contain the word "Interest"
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littleoldlady
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Post by littleoldlady on Jun 12, 2016 13:51:39 GMT
Yes to all your questions, and verified by my 2015-16 tax statement*.
Your question "Is this right ?" could be interpreted a couple of ways. " Thanks. And I should have said "Am I right?".
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ablender
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Post by ablender on Jun 19, 2016 19:24:18 GMT
When FS launched their SM I contacted HMRC and asked about this. HMRC's reply was that FS's SM is correct. Also I was told that P2P is still a young industry so changes may happen in the future.
Personally I do not care much if this SM is according to the rules or not. What matters to me is that I do not want to pay someone else's tax. For this reason I do not make use of SM either way.
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littleoldlady
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Post by littleoldlady on Jun 19, 2016 19:31:48 GMT
When FS launched their SM I contacted HMRC and asked about this. HMRC's reply was that FS's SM is correct. Also I was told that P2P is still a young industry so changes may happen in the future. Personally I do not care much if this SM is according to the rules or not. What matters to me is that I do not want to pay someone else's tax. For this reason I do not make use of SM either way. I sympathise with that point of view, but I have bought a few loans on the SM if the discount offered covered the extra tax. The trouble is that not enough sellers on the SM realise that they need to offer a discount to offset the tax in order to effectively sell at par. FS are seriously at fault by not clearly explaining this on their site. Only a minority of investors read this forum.
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Post by earthbound on Jun 19, 2016 19:32:35 GMT
Personally I do not care much if this SM is according to the rules or not. What matters to me is that I do not want to pay someone else's tax. For this reason I do not make use of SM either way. Personally i have seen many post's relating to the FS ..SM.. they all seem to be in relation to how higher tax payers can benefit... well good for them, i suspect the majority of investors in FS are not higher rate tax payers and therefor the SM does not work for the majority.
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duck
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Post by duck on Jun 20, 2016 5:52:26 GMT
Personally I do not care much if this SM is according to the rules or not. What matters to me is that I do not want to pay someone else's tax. For this reason I do not make use of SM either way. Personally i have seen many post's relating to the FS ..SM.. they all seem to be in relation to how higher tax payers can benefit... well good for them, i suspect the majority of investors in FS are not higher rate tax payers and therefor the SM does not work for the majority. Firstly congratulations on liking your own post earthbound I'm usually rather disappointed in mine  That said I have to disagree with your post since it can be made to work for normal tax rate payers as well. If you buy at time of origination and then sell with one or two months to go* as mrclondon has said since this is not taxable the system works for standard rate tax payers and has the added benefit that you have shed the risk of default at the same time. *the key to selling is setting the discount (which applies to the purchase price only) at a level which will attract those buying on the secondary market. As somebody who invests through a Ltd Co (personal account as well) I search the aftermarket daily for short dated discounted loans and I know I am not the only one! Yes this aftermarket is different to others and you need to apply a different mindset but IMO it works for all if you apply your circumstances to the market.
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Post by earthbound on Jun 20, 2016 7:15:53 GMT
Personally i have seen many post's relating to the FS ..SM.. they all seem to be in relation to how higher tax payers can benefit... well good for them, i suspect the majority of investors in FS are not higher rate tax payers and therefor the SM does not work for the majority. Firstly congratulations on liking your own post earthbound I'm usually rather disappointed in mine That said I have to disagree with your post since it can be made to work for normal tax rate payers as well. If you buy at time of origination and then sell with one or two months to go* as mrclondon has said since this is not taxable the system works for standard rate tax payers and has the added benefit that you have shed the risk of default at the same time. *the key to selling is setting the discount (which applies to the purchase price only) at a level which will attract those buying on the secondary market. As somebody who invests through a Ltd Co (personal account as well) I search the aftermarket daily for short dated discounted loans and I know I am not the only one! Yes this aftermarket is different to others and you need to apply a different mindset but IMO it works for all if you apply your circumstances to the market. Ooops never noticed,  in my defence it was supposed to be littleoldlady's above, i also agree with your general point that it can be made to work for all, but i still dont really understand why it could not be like the SS model, i think it is one of the things that gets moaned about the most with FS.
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duck
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Post by duck on Jun 20, 2016 7:52:15 GMT
No defending needed earthbound getting your head round the aftermarket is just one of those things .... and when you do it does have some great advantages for investors of all types. Looking at the figures that FS publish the aftermarket is fluid with a very decent turnover. Now I suspect that some of this is from investors that haven't understood the tax position but again I suspect that a lot of the turnover is from investors who fully understand the position and are using it to their advantage .... one well known investor on this forum gave his sales recently and if you calculate the tax advantage it is not to be sniffed at. I'm in a similar position but to a lesser degree. Have a look at how you can use the aftermarket and you will be pleasantly surprised  That said with my personal account I do not buy short term on the aftermarket since you can/will make a loss (after tax) which can be made even worse with early repayment/renewal. I suppose that apart from the legalities (and yes the FS aftermarket applies HMRC rules correctly) the biggest difference between the FS aftermarket and that at SS and similar is how it should be viewed for diversification purposes. Here term remaining is far more important (along with discount offered) in order that gains made whilst you hold the loan part outweigh the capital paid and still give you a decent return. Oh yes in reply to littleoldlady yes my statements tallied perfectly with how your understanding is. |
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stevio
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Post by stevio on Jul 3, 2016 0:34:12 GMT
could you give a worked example of where a basic rate tax payer sells at a discount but receives a tax advantage that cancels out the discount or even produces a gain?
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ben
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Post by ben on Jul 3, 2016 0:45:55 GMT
could you give a worked example of where a basic rate tax payer sells at a discount but receives a tax advantage that cancels out the discount or even produces a gain? For basic rate taxpayer it does not work that well, the saving is probably not worth it. Although it would reduce the risk to you. I can see a lot of people having a nice suprise when they have brought a loan on the secondary market with a month or two to go and having to pay the tax on the full term.
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duck
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Post by duck on Jul 3, 2016 6:28:53 GMT
could you give a worked example of where a basic rate tax payer sells at a discount but receives a tax advantage that cancels out the discount or even produces a gain? (18.66 KB) A very simple example based on £100 over 3 years. I knocked up the spreadsheet in 5 minutes so it may contain errors! Assumes 20% basic rate tax due. Tax once a year (no payments on account) - giving advantage to return on straight hold for term calc. No withdrawals/additions made. No defaults - giving advantage to return on straight hold for term calc. No dead time for reinvestment. Sold at 4.5 months. Sold at 0.75% discount. Capital gains 'ignored'. I tried to give a balanced calc (giving no advantage to either scenario) but you need to look at your personal tax position. For example I have to make payments on account (in advance) and if you are or have the potential to be a higher rate tax payer you can produce far greater gains. IMHO the only way to get your head round this aftermarket is to produce a spreadsheet that works with individual circumstances included (I use mine continually) and not to simply look at £ return but to also take into account the benefits of shedding risk and other 'intangibles'. It should be the total of these factors that should set the discount that a loan is sold at. Which is a very long way of saying 'A bird in the hand .......'
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stevio
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Post by stevio on Jul 3, 2016 8:45:20 GMT
could you give a worked example of where a basic rate tax payer sells at a discount but receives a tax advantage that cancels out the discount or even produces a gain? A very simple example based on £100 over 3 years. I knocked up the spreadsheet in 5 minutes so it may contain errors! Assumes 20% basic rate tax due. Tax once a year (no payments on account) - giving advantage to return on straight hold for term calc. No withdrawals/additions made. No defaults - giving advantage to return on straight hold for term calc. No dead time for reinvestment. Sold at 4.5 months. Sold at 0.75% discount. Capital gains 'ignored'. I tried to give a balanced calc (giving no advantage to either scenario) but you need to look at your personal tax position. For example I have to make payments on account (in advance) and if you are or have the potential to be a higher rate tax payer you can produce far greater gains. IMHO the only way to get your head round this aftermarket is to produce a spreadsheet that works with individual circumstances included (I use mine continually) and not to simply look at £ return but to also take into account the benefits of shedding risk and other 'intangibles'. It should be the total of these factors that should set the discount that a loan is sold at. Which is a very long way of saying 'A bird in the hand .......' Thanks Duck and going to the effort of creating a spreadsheet Seems like you break even, but have the benefit of no tax (useful if it would push you into higher rate) and less chance of default at the end of the loan. But you have to put a little time into to actively manage, fine if your retired, but have to factor if limited time With fairly high defaults at FS and potentially higher with the property loans, side stepping defaults might be worth the effort
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duck
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Post by duck on Jul 3, 2016 9:38:35 GMT
That's about it, but 'fine tuning' to personal circumstance is really the key.
My spreadsheet attempts to show a level playing field but as you say or it could be to keep you under the £17K limit if you live on 'interest' only. Playing with the discount and term held also changes things quite considerably along with payments on account which I see coming to many more people as the current changes take effect. Talking to my accountant last week, he took the view that 3 monthly returns are not that far away as we are all forced to fill in online returns.
If that takes effect and paying tax in arrears becomes a thing of the past this aftermarket will become even more attractive!
I acknowledge the amounts are small but if you have more than a handful of loans and just a few grand invested you can certainly increase your return and cut down your risk which can't be bad!
On the other side of the equation my Ltd Co almost exclusively buys short dated loans and is currently showing 14.8% pre tax which whilst not stunning is more than acceptable.
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stevio
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Post by stevio on Jul 3, 2016 16:44:06 GMT
That's about it, but 'fine tuning' to personal circumstance is really the key. My spreadsheet attempts to show a level playing field but as you say or it could be to keep you under the £17K limit if you live on 'interest' only. Playing with the discount and term held also changes things quite considerably along with payments on account which I see coming to many more people as the current changes take effect. Talking to my accountant last week, he took the view that 3 monthly returns are not that far away as we are all forced to fill in online returns. If that takes effect and paying tax in arrears becomes a thing of the past this aftermarket will become even more attractive! I acknowledge the amounts are small but if you have more than a handful of loans and just a few grand invested you can certainly increase your return and cut down your risk which can't be bad! On the other side of the equation my Ltd Co almost exclusively buys short dated loans and is currently showing 14.8% pre tax which whilst not stunning is more than acceptable. Why just short dated for Ltd? Would you not look at the overall return, irrespective of the length? How do you find the effort needed for accounting for these purchases vs return?
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in my defence it was supposed to be littleoldlady's above, i also agree with your general point that it can be made to work for all, but i still dont really understand why it could not be like the SS model, i think it is one of the things that gets moaned about the most with FS. 
