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Post by toonee on Jul 18, 2016 14:24:42 GMT
Hi, I am new to peer-to-peer lending and have been looking around trying to figure out what is best for me.
I noticed something written on a lender's site (FundingSecure) regarding buying loan parts on the secondary market: "When buying a loan part you are purchasing the original loan part. In line with HMRC rules you will therefore be responsible for any tax liability on all interest paid when the loan completes."
If you are responsible for the tax of all interest, not just for the months since you bought the loan part, does that mean that if you invested into a new loan and sold it before the end of its term, you would not be responsible for tax on any interest you earn? So effectively you can avoid paying tax on all your interest if you do this with all loans you invest in?
Thanks for any clarification you can provide.
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SteveT
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Post by SteveT on Jul 18, 2016 14:31:02 GMT
Yes, but that only applies on FS because of the slightly odd way their secondary market operates. Beware that, because of this, you are likely to have to discount the loan in order to get it to sell, else you'll find yourself disadvantaged versus all the others trying to do the same thing.
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james
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Post by james on Jul 18, 2016 15:17:52 GMT
I noticed something written on a lender's site (FundingSecure) regarding buying loan parts on the secondary market: "When buying a loan part you are purchasing the original loan part. In line with HMRC rules you will therefore be responsible for any tax liability on all interest paid when the loan completes." Normal UK individuals are subject to tax on interest on the date on which it is received. If that's all at the end of the loan then the person holding the loan at the end would be liable to all of the income tax in exchange for receiving all of the interest which is paid at that time. You should also pay very careful attention to the capital gains and income tax treatment of loans that you purchase on the secondary market. Such loans according to normal HMRC guidance cease to be "simple debts" and hence normal CGT gains and losses apply to any later sales/purchases of those loans. Hopefully FundingSecure tracks this and provides nice reports to make it easy to file the correct tax reports. I've a list of notes on various aspects of tax treatment for some platforms at Capital Gains Tax filing needed. You may find it useful to read it to get an idea of the range of treatments that platforms assert apply.
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Post by toonee on Jul 18, 2016 15:40:11 GMT
Thanks for the quick responses.
Am I right in saying that the tax you pay on interest is based on the income tax band you are in, however, if your taxable income is <£17,000 you don't pay tax on any interest?
So, if for example you didn't work, and thus your taxable income was below the £17,000 threshold for paying tax on interest, you could take advantage of the way FundingSecure's interest is paid, by buying loans on the secondary market that are towards the end of their term at a discount, and you won't be hit by the tax on the entire interest?
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SteveT
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Post by SteveT on Jul 18, 2016 15:46:10 GMT
Essentially yes. Non-taxpaying individuals and company lenders can take advantage of SM discounts on FS, but do thereby take on all of the default risk for what may be a fairly short period of investment. Remember that you've already paid the seller for the interest accrued before you bought it from them
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james
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Post by james on Jul 18, 2016 15:52:29 GMT
Yes, the FundingSecure treatment allows for the potential of gains for both buyer and seller via income tax or CGT arbitrage between their different tax rates.
The potential to exploit this may increase significantly assuming the investments become available inside an ISA, with those in an ISA potentially having a nice incentive to buy at a discount from those holding outside an ISA.
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Post by toonee on Jul 18, 2016 15:56:13 GMT
Thanks for clarifying that.
Is there somewhere that has statistics on what % of defaults occur in the last 1-2 months?
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SteveT
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Post by SteveT on Jul 18, 2016 16:42:21 GMT
Thanks for clarifying that. Is there somewhere that has statistics on what % of defaults occur in the last 1-2 months? On FS, defaults pretty much will only come to light at the end of the 6 months term since nothing is due from the borrower before that point.
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