Greenwood2
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Post by Greenwood2 on Nov 22, 2016 15:17:52 GMT
I'm out, as the saying goes.
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james
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Post by james on Nov 22, 2016 15:46:12 GMT
This post is partly obsolete. TMP have clarified that per 7.1 in their terms and conditions the fee is paid by the borrower before interest is paid to the lenders. That produces the favourable income tax result, not the less favourable one. james , unless I misunderstood you, £10,000 lent for 15 days at 0.3% interest is £450 not £4,500 (10,000 * 0.003 * 15). So, pretty bad if bad debt is expected to be £700. Thanks, yes it is, a wrong decimal place error by me. Having corrected that here are the anticipated results of lending. 40% tax payer, 15 day loans of £10,000 total at 0.3% a day:
1. £450 gross interest. For income tax the bad debt can be deducted, that's 7% of £10,000. £700. The £450 is tax free and £250 of bad debt relief can be used for reducing the income tax at other platforms. 2. 35% of £450 taken by platform, £157.50. Paid to lender £292.50. 3. since there's £700 of bad debt, £700 - £292.50 = £407.50 of loss each time 4. that is partially offset by the 40% income tax potentially saved on the £250 of bad debt relief that can be used for interest on other platforms. That's £100 at 40%. 5. so anticipated net position is £307.50 loss for each iteration of this lending.
The 20% income tax version has only £50 of tax saving at other platforms so its anticipated loss is £357.50 each iteration.
40% tax payer, 30 day loans of £10,000 total at 0.3% a day:
1. £900 gross interest. For income tax the bad debt can be deducted, that's 7% of £10,000. £700. Income tax at 40% is due on the £200 leaving £120 initial gain after income tax. 2. 35% of £900 taken by platform, £315. Paid to lender £585. 3. since there's £700 of bad debt, £585 - £700 - £80 = £195 of loss each time
The 20% version has a £40 income tax deduction so it's loss is lower, £155 each time.
40% tax payer, 15 day loans of £10,000 total at 0.6% a day:
Same as the above 30 day at 0.3% a day case.
40% tax payer, 30 day loans of £10,000 total at 0.6% a day:
1. £1800 gross interest. For income tax the bad debt can be deducted, that's 7% of £10,000. £700. Income tax at 40% is due on the remaining £1100, £440, leaving £660 initial gain after income tax.
2. 35% of £1800 taken by platform, £630. Paid to lender £ 1170 3. since there's £700 of bad debt, £1170 - £700 - £440 = £30 of profit each time
Basic rate tax payer has only £220 of income tax so the potential profit there is £250 each time. Top rate tax payer has £55 more income tax and expected loss of £25 each time.
If the platform changed the fee structuring to charge the borrower the change is quite significant: 1. £1800 gross interest paid by borrower then 35% fee deducted. £630. Gross paid to lender £1170. For income tax the bad debt can be deducted, that's 7% of £10,000. £700. Income tax at 40% is due on the remaining £470, £188, leaving £282 initial gain after income tax. 2. no more fee deduction. Paid to lender £ 1170 3. since there's £700 of bad debt, £1170 - £700 - £188 = £282 of profit each time The difference between potentially making £282 after tax or £30 after tax shows how important the change of who gets charged the fee is. Basic rate tax payer has £94 less income tax so a potential gain with revised fee structure of £376 a time. All barring an arithmetic error on my part of course. £30 of potential profit with £700 of anticipated bad debt just isn't a very attractive proposition and all it would take is 7.3% instead of 7% bad debt to eliminate the profit at 40% income tax and 0.6% a day for 30 days.This suggests to me that it is not very sensible to use this platform given the current fee structure.
At least it should be clear to The Money Platform what one of their highest priority to do list items needs to be: fixing the fee structure.
Next after that for me would be indicating to potential lenders when their offers are anticipated to deliver a loss for their supplied income tax rate if the expected bad debt level happens. People lending at 0.3% implies that the lenders don't understand the proposition and that they are projected to lose money by doing it.
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michaelc
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Post by michaelc on Nov 22, 2016 21:11:49 GMT
I _was_ quite keen to test the water here by building up around ten loans.
I joined the site last Friday and have been unable to register my debit card ever since. I received an automated email from "George" on Monday asking me to put some cash in which I'd gladly do if I could !
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markr
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Post by markr on Nov 22, 2016 23:57:57 GMT
I _was_ quite keen to test the water here by building up around ten loans. I joined the site last Friday and have been unable to register my debit card ever since. I received an automated email from "George" on Monday asking me to put some cash in which I'd gladly do if I could ! It does seem a common problem, I was "lucky" to get the automated call from Santander asking me to confirm the transaction, otherwise I'd have had no idea what was going wrong and would most likely have given up. Seems pretty much every bank rejects their test transaction, and you need to ask your bank to authorise them. TMP really need to have a word with Mangopay to see why this is happening. If you do get funds in, don't hold your breath waiting to get 10 loans matched, especially in the £250 market. I've had one match since making my offers on the 16th although I think I should now be front of the queue on the 12 week loans so fingers crossed for another match soon!
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hendragon
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Post by hendragon on Nov 25, 2016 9:36:48 GMT
I have just received an e-mail from TMP requesting honest feedback via this forum.
First of all well done TMP. They have taken a certain amount of criticism on here and this attitude bodes well.
Second MODS would it be time for them to have their own board?
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Post by The Money Platform on Nov 25, 2016 9:52:58 GMT
Lenders receive back their principle plus 65% of the interest payable. Lenders never receive the remaining 35% which is taken by The Money Platform as the loan administration fee. Any tax owed is therefore only due on the 65% that the lender receives back. Please note that we are not tax experts and lenders may wish to take professional advice. That is not the normal income tax position for P2P so you may wish to investigate more before telling people that it is the position. The actual usual P2P position is this: 1. £100 of interest paid by borrower. 2. Income tax of £40 due, so lender is currently £60 up if a 40% tax payer. 3. TMP takes £35 so lender is currently £25 up if a 40% tax payer. 4. Default risk and collection failures have to be paid for out of the £25 though at least there is the ability to deduct the losses from the gross £100 so it's not initially as bad as it seems. However, that doesn't have to be the position. It's only that way because TMP is charging lenders. TMP can instead charge borrowers. That deduction is not taxable to the lenders so the calculation changes to: 1. £65 of interest paid by borrower after the borrower fee deducted. 2. Income tax of £26 due, so lender is currently £39 up if a 40% tax payer. 3. TMP takes no more so lender is £39 instead of the previous £25 up if a 40% tax payer. 4. Default risk and collection failures have to be paid for out of the £39 though at least there is the ability to deduct the losses from the gross £65 so it's not initially as bad as it seems and the reduced 65 increases the effective tax benefit. Simply it seems that TMP didn't understand the tax position and it's importance and as a result designed in a tax-inefficient charging structure. TMP won't be the first to change the way charges are taken, Zopa did it some years back for exactly this reason. TMP needs to follow them in charging borrower rather than lender. Once that's dealt with, if it is, the next thing to consider is the 7% default rate which I assume is 7% of every £100 lent. Assume that the money is lent at 0.3% a day not compounding, on £10,000 total lending for say 15 days average that's gross interest of £450 and anticipated losses of £700. It's currently unclear whether the 35% fee is charged to the lenders if the borrower defaults. Currently unclear when TMP will deem a loan to be "irrecoverable" so that it's eligible for the tax relief on bad debt. So far as the fee to withdraw goes it's potentially a useful anti-abuse tool so it might be practical to not charge for one or two per month if a charge is required. Hi James, Sorry for not getting back to you sooner. On our loan administration fee: this is payable by the borrower (you will be able to see this is 7.1 of our Terms of Service). We also wanted to make you aware we will shortly be posting a report that we have commissioned on the tax position for UK P2P lenders. The Money Platform Team
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Post by The Money Platform on Nov 25, 2016 10:21:31 GMT
Hi guys - lots of lenders have been sending us queries on the tax position for lenders, so as promised we have commissioned a report on this topic. As per our earlier statement in this forum, borrowers pay the loan administration fee. Here is the report: P2P Lending – Tax Update
November 2016
We refer below to some recent tax changes relating to P2P lending. The information provided is a brief summary and we are not able to advise you as to your tax position. Please note that the amount of income tax payable by you is dependent on your individual circumstances and may be subject to change in the future. You should consult your tax adviser about any queries you may have. Bad Debt Relief.
With effect from 6 April 2016 bad debts incurred by an individual in respect of eligible P2P loans can be set off against interest received in the same tax year from other eligible P2P loans made using the same P2P platform in arriving at the taxable income of the individual. The same is true for bad debts arising in the year commencing 6 April 2015 but for that year a specific claim for relief must be made in a tax return. There are also rules allowing bad debts which cannot be relieved in this way to be set against interest on P2P loans made on other platforms and to carry forward unused relief – these types of relief must be claimed in a tax return. Further guidance on the detail of these rules can be found at: www.gov.uk/government/publications/income-tax-relief-for-irrecoverable-peer-to-peer-loans-final-guidancePersonal Savings Allowance.
The new Personal Savings Allowance was introduced with effect from 6 April 2016 exempting the first £1,000 of savings income from tax for basic rate taxpayers and the first £500 for higher rate taxpayers. An individual’s PSA will apply to interest they receive from P2P lending after any relief for bad debts. Further information about the allowance can be found at: www.gov.uk/government/publications/personal-savings-allowance-factsheet/personal-savings-allowanceInterest Payments – Deduction of Tax
Existing rules often require tax to be deducted from payments of interest but HMRC has recognised the complexity of seeking to apply these rules to P2P lending. In January 2016 HMRC announced an interim measure allowing interest payments made via FCA authorised P2P platforms to be paid without deduction of tax. It will however be the responsibility of the lender to notify HMRC of the income and to pay the correct amount of tax due. Details of the full announcement can be accessed at: www.gov.uk/government/publications/revenue-and-customs-brief-2-2016-deduction-of-income-tax-at-source-from-payments-of-peer-to-peer-interest/revenue-and-customs-brief-2-2016-deduction-of-income-tax-at-source-from-payments-of-peer-to-peer-interestHMRC has also announced that legislation is proposed to be enacted in Finance Act 2017 to replace the interim measure. The position will need to be reviewed when draft legislation is published.
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james
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Post by james on Nov 25, 2016 11:30:12 GMT
On our loan administration fee: this is payable by the borrower (you will be able to see this is 7.1 of our Terms of Service). Thanks. I've edited a fair bit of the two most relevant posts to reflect this. Good to read that things are really structured in the tax-efficient way.
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Post by The Money Platform on Nov 25, 2016 14:07:32 GMT
This post is partly obsolete. TMP have clarified that per 7.1 in their terms and conditions the fee is paid by the borrower before interest is paid to the lenders. That produces the favourable income tax result, not the less favourable one. Lenders receive back their principle plus 65% of the interest payable. Lenders never receive the remaining 35% which is taken by The Money Platform as the loan administration fee. Any tax owed is therefore only due on the 65% that the lender receives back. Please note that we are not tax experts and lenders may wish to take professional advice. That is not the normal income tax position for P2P so you may wish to investigate more before telling people that it is the position.
The actual usual P2P position is this:
1. £100 of interest paid by borrower. 2. Income tax of £40 due, so lender is currently £60 up if a 40% tax payer. 3. TMP takes £35 so lender is currently £25 up if a 40% tax payer. 4. Default risk and collection failures have to be paid for out of the £25 though at least there is the ability to deduct the losses from the gross £100 so it's not initially as bad as it seems.
However, that doesn't have to be the position. It's only that way because TMP is charging lenders. TMP can instead charge borrowers. That deduction is not taxable to the lenders so the calculation changes to: 1. £65 of interest paid by borrower after the borrower fee deducted. 2. Income tax of £26 due, so lender is currently £39 up if a 40% tax payer. 3. TMP takes no more so lender is £39 instead of the previous £25 up if a 40% tax payer. 4. Default risk and collection failures have to be paid for out of the £39 though at least there is the ability to deduct the losses from the gross £65 so it's not initially as bad as it seems and the reduced 65 increases the effective tax benefit. Simply it seems that TMP didn't understand the tax position and it's importance and as a result designed in a tax-inefficient charging structure.
TMP won't be the first to change the way charges are taken, Zopa did it some years back for exactly this reason. TMP needs to follow them in charging borrower rather than lender.
Once that's dealt with, if it is, the next thing to consider is the 7% default rate which I assume is 7% of every £100 lent. Assume that the money is lent at 0.3% a day not compounding, on £10,000 total lending for say 15 days average that's gross interest of £450 and anticipated losses of £700. It's currently unclear whether the 35% fee is charged to the lenders if the borrower defaults. Currently unclear when TMP will deem a loan to be "irrecoverable" so that it's eligible for the tax relief on bad debt. So far as the fee to withdraw goes it's potentially a useful anti-abuse tool so it might be practical to not charge for one or two per month if a charge is required. Please note that borrowers pay the loan administration fee and lenders do not pay the 35% loan administration fee in the event of borrower default. We have received questions as to whether a 7% default rate would make investing loss making. We do not believe this to be the case as follows: For the ease of maths let's assume a lender lends 100 loans £1000 each all for 3 months. £100,000 total lent. 7% default rate. 7 loans do not repay. £7000 lost. At the lowest daily rate of 0.3%, the remaining 93 loans would earn lenders 16.38% in interest (0.3% X 84 days X 65%) which would total £15,233.40 in interest earnt. So from total investment of £100,000 lender would be left with £100,000 + (£15,233.40 - £7000) = £108,233.40 Equates to a 8.23% profit (over the 84 day period).
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james
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Post by james on Nov 25, 2016 15:14:20 GMT
We have received questions as to whether a 7% default rate would make investing loss making. We do not believe this to be the case as follows: For the ease of maths let's assume a lender lends 100 loans £1000 each all for 3 months. £100,000 total lent. 7% default rate. 7 loans do not repay. £7000 lost. At the lowest daily rate of 0.3%, the remaining 93 loans would earn lenders 16.38% in interest (0.3% X 84 days X 65%) which would total £15,233.40 in interest earnt. So from total investment of £100,000 lender would be left with £100,000 + (£15,233.40 - £7000) = £108,233.40 Equates to a 8.23% profit (over the 84 day period). Yes, with 3 months the picture is more favourable than the 15 day and 30 day durations I used to illustrate how the effect of the default rate per loan is linked to the duration of the loan, assuming the default rate doesn't change with loan duration.
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james
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Post by james on Nov 25, 2016 15:18:39 GMT
I'm a little confused by the reference saying interest is often taxed before being paid - I've been a lender on ZOPA forever and I don't recall them ever paying net and we always have to put it on the tax return. What am I missing? Interest isn't taxed before being paid on most platforms and HMRC doesn't require that. But it is liable to tax so in illustrations it is often more convenient to show it taxed at that point rather than whenever HMRC gets paid. This was more significant before the rules were changed to allow certain bad debt losses to be deducted from gross interest but it still matters if fees are charged to lenders, which is why it's important for platforms to do as TMP does and charge the borrower.
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Greenwood2
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Post by Greenwood2 on Nov 25, 2016 16:53:04 GMT
I'm not sure HMRC will buy that the fee is a borrower fee (and therefore not taxable) if it is deducted off the lender rate as shown in the TMP example, ie, the lender only gets 65% of the rate they are supposedly lending at. The lender rates should be quoted after deduction of the fee if it never belonged to the lender.
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james
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Post by james on Nov 25, 2016 20:00:36 GMT
I'm not sure HMRC will buy that the fee is a borrower fee (and therefore not taxable) if it is deducted off the lender rate as shown in the TMP example, ie, the lender only gets 65% of the rate they are supposedly lending at. The lender rates should be quoted after deduction of the fee if it never belonged to the lender. That would be a good thing for TMP to get advice on to include in their report.
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Greenwood2
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Post by Greenwood2 on Nov 26, 2016 11:52:47 GMT
Following on from James's comments on effect of loan length on profit. Looking at break even points for the different length loans, using the same calculation as TMP (£100,000 invested in £1000 lots), and assuming I've calculated it correctly (please check someone!) To make a profit on 15 day loans the default rate would need to be 2% or less, the default rate on 30 day loans would need to be 5% or less and on 84 day loans 14% or less. I don't know what actual default rates will be even 14% may be optimistic. Not allowing for tax relief on bad debt, or tax on the 35% fee.
A bit scary if correct.
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michaelc
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Post by michaelc on Nov 27, 2016 20:39:47 GMT
Well I've dipped my toe in and will report back what happens over the coming months.
One thing I did notice if I'm not mistaken, is that if the borrower repays early, then the lender gets daily interest paid up until that point (fair enough). But as I understand it, the platform gets their full whack 33% paid since it is classified as an "administration fee". Would seem a lot fairer to me if that fee was also shared with the lender.
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