mikes1531
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Post by mikes1531 on Oct 5, 2016 20:45:08 GMT
I'm not in FS but as a non-taxpayer this caught my attention. Do I have this correct? People sell at a discount on the FS SM to avoid/reduce tax, which isn't applicable to me so I can reap the full benefits of the discount? : Further to what's already been said, you might need to be careful that you don't lose your non-taxpayer status if the reason you're a non-taxpayer is simply because your income is below the tax-paying threshold. If someone sells a £100 12% loan part after five months, it will be priced at £105 because of the notional £5 of interest that's accrued. And if the seller offers a 1% discount to cover the £1 of tax that a basic-rate taxpayer would owe on the transferred income, then the net price would be £104. If all goes according to plan, a month later the loan will be repaid and the buyer would receive £100 plus £6 of interest, and have a net profit of £2 compared to their £104 purchase price. They'll have £6 of interest income to report, and if they're a non-taxpayer they'll have no tax to pay. The point to note is that they're £2 better off in their pocket, but they have £6 of income to report. And if they're a non-taxpayer because their income is only a bit below the tax paying threshold then it might not take a very big investment before they generate enough income and become liable to tax. Finally, if someone is a non-taxpayer because they have very little income at all, then the above effect might not be something they need to worry about, but their low income might suggest to some that P2P lending might not be suitable for that person because there's too much risk involved. Disclaimer: I'm no expert, and I'm not qualified to give advice, so please don't take this as advice. You need to do your own research and make your own decisions -- probably with proper advice.
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mikes1531
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Post by mikes1531 on Oct 5, 2016 21:03:04 GMT
Of the platforms I use, FC, SS & Ablrate all treat loan parts as securities and record accrued interest as taxable interest in the hands of the seller. : I can't speak for the other two platforms, but I wouldn't say that SS records accrued interest as described above. AIUI, what SS do is make a note of how much interest the seller had accrued up to the time that they put the part up for sale, and then they pay that to the seller when they distribute the next interest payment on that loan -- which, in most cases, is at the end of the month the sale takes place. So the accrued interest becomes taxable to the seller simply because they've received it from the platform/borrower. The buyer isn't involved at all in any interest accrued before their purchase. AIUI, FS take the position that their loan parts are 'simple debts' when held from the loan's beginning. (See the first part of HMRC's HelpSheet 296.) AFAIK, the CGT treatment is different for loan parts purchased on the SM, and that may apply to interest income as well. Disclaimer: I'm not expert, so do your own research.
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nick
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Post by nick on Oct 5, 2016 22:27:27 GMT
Of the platforms I use, FC, SS & Ablrate all treat loan parts as securities and record accrued interest as taxable interest in the hands of the seller. : I can't speak for the other two platforms, but I wouldn't say that SS records accrued interest as described above. AIUI, what SS do is make a note of how much interest the seller had accrued up to the time that they put the part up for sale, and then they pay that to the seller when they distribute the next interest payment on that loan -- which, in most cases, is at the end of the month the sale takes place. So the accrued interest becomes taxable to the seller simply because they've received it from the platform/borrower. The buyer isn't involved at all in any interest accrued before their purchase. AIUI, FS take the position that their loan parts are 'simple debts' when held from the loan's beginning. (See the first part of HMRC's HelpSheet 296.) AFAIK, the CGT treatment is different for loan parts purchased on the SM, and that may apply to interest income as well. Disclaimer: I'm not expert, so do your own research. : thank you for correcting me on how SS records accrued interest - you're correct in pointing out that the borrower pays the interest accrued up to the point of sale and that this is not settled by the buyer of the loan part.
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Brainer
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Post by Brainer on Oct 6, 2016 0:30:58 GMT
Thanks to james and mikes1531. Definitely sounds like something to investigate for me then. If my maths is correct, mike's example gives a return of about 23% (annualised) for the month the buyer holds the loan, so even taking into account the negatives of buying loans near term, that sounds a decent strategy. Obviously your example may not be typical, but I guess I'll find that out when I sign up. And thanks for the warning re tax threshold. |
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stevio
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Post by stevio on Oct 6, 2016 12:44:19 GMT
james mikes1531 Is the money received form investing on the FS primary market and selling the same loan on the secondary market declarable in any way? I understand you are not taxed, but I am surprised if it doesn't need to be documented somewhere, even if one box on a tax return cancels out the other? Additionally, how does the paying interest from date of investing work on FS for renewals, do you continue to earn interest whilst the loan is waiting to fill and renew? Admin this thread relates a lot to the FS secondary market thread, not sure if parts wouldn't benefit from being moved?
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james
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Post by james on Oct 6, 2016 13:18:03 GMT
Nothing to do for simple debts in the hands of their original owner: exempt from CGT. Though I suppose keeping records for possible CGT mention would be sensible even if not relevant.
Probably best to keep here since it's of interest to Saving Stream investors who might not be familiar with Funding Secure. Would be different if it was a routine thing but occasionally is good sharing of knowledge between platform options.
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SteveT
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Post by SteveT on Oct 6, 2016 13:52:01 GMT
Additionally, how does the paying interest from date of investing work on FS for renewals, do you continue to earn interest whilst the loan is waiting to fill and renew? The existing loan lenders carry on accruing interest throughout the period the renewal loan is filling, at which point the existing loan is Completed and interest paid. At that point, lenders that opted into the renewal loan see their funds rolled over and start accruing interest anew. New funds bid into the renewal loan (whether by new lenders or as additional funds from existing loan lenders) start accruing interest in the new loan from the day they bid. Hence, at the end of each loan, some loan parts will have accrued a few more days of interest than others.
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mikes1531
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Post by mikes1531 on Oct 6, 2016 17:42:36 GMT
If my maths is correct, mike's example gives a return of about 23% (annualised) for the month the buyer holds the loan, so even taking into account the negatives of buying loans near term, that sounds a decent strategy. Obviously your example may not be typical, but I guess I'll find that out when I sign up. : Your maths are correct. When you look at the list of parts for sale, you'll see that FS display the "Effective rate" which is as you've calculated. It doesn't include any tax effects, so it's the return that a non-taxpayer would be getting if the loan was repaid on the day it's supposed to. At the moment, there are about 1300 parts for sale on the FS SM, and more than 100 of those are showing an effective rate in excess of 20%.
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mikes1531
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Post by mikes1531 on Oct 6, 2016 17:51:25 GMT
Additionally, how does the paying interest from date of investing work on FS for renewals, do you continue to earn interest whilst the loan is waiting to fill and renew? The existing loan lenders carry on accruing interest throughout the period the renewal loan is filling, at which point the existing loan is Completed and interest paid. At that point, lenders that opted into the renewal loan see their funds rolled over and start accruing interest anew. New funds bid into the renewal loan (whether by new lenders or as additional funds from existing loan lenders) start accruing interest in the new loan from the day they bid. Hence, at the end of each loan, some loan parts will have accrued a few more days of interest than others. A consequence of this FS policy is that during the renewal period interest is accruing on the whole of the 'original' loan plus as much of the 'renewal' loan as is funded with 'new' money. It's not an issue when loans renew quickly, but could add up to a significant expense for FS if a lot of 'original' lenders choose not to renew their investment and the renewal loan takes a long time to fund, as interest is accruing during the renewal period on more than 100% of a loan -- and the borrower probably won't be asked to pay any extra interest. Hopefully FS can afford this.
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stevio
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SS vs FS
Oct 6, 2016 19:14:28 GMT
via mobile
Post by stevio on Oct 6, 2016 19:14:28 GMT
If my maths is correct, mike's example gives a return of about 23% (annualised) for the month the buyer holds the loan, so even taking into account the negatives of buying loans near term, that sounds a decent strategy. Obviously your example may not be typical, but I guess I'll find that out when I sign up. : Your maths are correct. When you look at the list of parts for sale, you'll see that FS display the "Effective rate" which is as you've calculated. It doesn't include any tax effects, so it's the return that a non-taxpayer would be getting if the loan was repaid on the day it's supposed to. At the moment, there are about 1300 parts for sale on the FS SM, and more than 100 of those are showing an effective rate in excess of 20%. The increase in number has been recent though as someone thinks it's good to put multiple small parts up rather than a lump sum. I notice because I check SM least once a day. I think the idea is to fill a page so it's more likely people will buy from that seller as people are lazy and less likely to turn a page. You see this tactic on EBay, same item listed multiple times yo fill several pages. Else they think smaller parts might not scare a buyer off compared to a lump sum, that might make a buyer think it is a problem loan if there is a large lump sum
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mikes1531
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Post by mikes1531 on Oct 6, 2016 22:51:29 GMT
At the moment, there are about 1300 parts for sale on the FS SM... The increase in number has been recent though as someone thinks it's good to put multiple small parts up rather than a lump sum. I notice because I check SM least once a day. : What makes you think investors are putting up multiple small parts of a given loan? Until this summer, when FS started paying interest on loans from the time an investment was made -- with the knock-on effect that an investor could have multiple parts of a given loan -- an investor had just one entry per loan in their investment list. You could put part of your holding up for sale, but you couldn't put a second part of that loan up for sale until the first part sold or its sale was cancelled. (If you tried to sell a loan part, you could only add a part from a loan that wasn't already for sale. If a loan already was for sale, the 'Sell' button became a 'Edit' button.)
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