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Post by sannytwist on Jan 3, 2017 7:48:54 GMT
Hi all, so l purchased part of a loan on the secondary market. Made like 5p over a few days, now l want to sell this back to the secondary market. My question is does the interest l gain go directly into my account or do l get the interest at the end of the month? Sorry for the really noob question  |
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archie
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Post by archie on Jan 3, 2017 8:04:35 GMT
Neither Interest is only paid at the end of a loan on FS. When you purchase an investment on the sm you inherit the rolled up interest and pay the seller the equivalent amount. If you keep until term you are liable to tax on the total of inherited interest plus interest earned while you own the loan part. When you sell an investment on the sm your rolled up interest will be paid by the buyer so you aren't liable to be taxed on any of the interest. I'm not certain if the tax liability differs if you both bought and then sold via the sm. |
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Post by sannytwist on Jan 3, 2017 8:21:42 GMT
Thanks for the info, appreciated
So l will get the 5p of interest when the loan is completed at the end of the term right?
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archie
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Post by archie on Jan 3, 2017 8:26:17 GMT
Thanks for the info, appreciated So l will get the 5p of interest when the loan is completed at the end of the term right? Only if you held to term. If you sell, the buyer will pay you the 5p interest as part of the purchase price. If you place something on the sm the price will change each day to reflect the amount of interest due to you.
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fp
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Post by fp on Jan 3, 2017 10:03:31 GMT
if you sell it today at no discount you will receive the interest as part of the payment from the buyer today
Eg; if your loan part is a £25 loan part with 5p interest and you sell it today, you will receive £25.05 today as the buyer will also buy the interest entitlement from you.
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Post by sannytwist on Jan 3, 2017 10:31:12 GMT
that cleared it up for me , thanks
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archie
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Post by archie on Jan 3, 2017 12:03:52 GMT
if you sell it today at no discount you will receive the interest as part of the payment from the buyer todayEg; if your loan part is a £25 loan part with 5p interest and you sell it today, you will receive £25.05 today as the buyer will also buy the interest entitlement from you. So in the case above is the 5p treated as a capital gain for the seller? If the loan was originally purchased from the primary market there is no capital gain or income tax liability for the seller. If the loan was purchased from the sm and then resold the seller might be liable to the gain.
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SteveT
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Post by SteveT on Jan 3, 2017 12:24:50 GMT
... until HMRC determine that you are now "trading" and therefore liable to tax, like a company, on all "profit" however it arises.
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archie
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Post by archie on Jan 3, 2017 12:46:37 GMT
But the FS website says If you buy and then resell the same loan part on the secondary market you may be considered by HMRC to be a trader and be potentially liable for capital gains tax. Does that not just refer to if you are buying on the SM and then selling again? As long as the original purchase is on the PM then you should be fine and not classed as a trader, correct? That's how I understood it.
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Post by geoffp on Jan 3, 2017 13:18:50 GMT
So let me get this straight You can invest £1m on the PM receive 12% + say 3% bonus for large investment, plus occasional cash back incentive hold for a few months and then sell before the last 30 days on the SM and you have 12%+pa return no SM selling fees no income tax liability no CGT liability no reporting gains of over 4x CGT allowance limit to HMRC Wow! Except that you would be extremely unlikely to actually sell your investment on the secondary market without a very substantial discount offer. I think too that the size of the discount needed would increase substantially if your sale was within a few days of finishing.
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SteveT
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Post by SteveT on Jan 3, 2017 13:20:30 GMT
The problem is that there is no formal definition of what constitutes "a venture in the nature of trade" and it relies on case law to determine which side of the line an activity sits. At some point, if HMRC believe there is significant avoidance going on, they're likely to bring a test case. This makes interesting reading on the subject: www.taxation.co.uk/Articles/2011/06/29/277131/youre-trading"Trade or venture? Even if an activity is insufficient to amount to a trade, it can still be treated as such for tax purposes if it is a venture in the nature of trade. But what is the difference between them? In broad terms, a ‘trade’ is normally established as a continuous operation with a degree of organisation or an infrastructure." (IMO, a continuous process of buying new loans, selling them before term and repeating with the proceeds could well meet that sort of test.) "The recommended approach can perhaps be summed up in Marson v Morton, where Sir Nicolas Browne-Wilkinson V-C said: ‘I believe that in order to reach a proper factual assessment in each case it is necessary to stand back, having looked at those matters, and look at the whole picture and ask the question … was this an adventure in the nature of trade?’ This holistic approach is perhaps reminiscent of the ‘elephant test’ – difficult to describe, but you know one when you see one." |
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stevio
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Post by stevio on Jan 3, 2017 20:46:42 GMT
FWIW my 2p
The 12℅ interest rate is an annual interest rate so you would receive a proportion of this for the length of time held, so 1℅ per month. Also I think bonuses are only paid if held to term? So as loans can only be sold upto 30 days before the end, the most return from interest would be 5℅
But, due to needing to discount the loan to offset the inherited tax to the buyer, this often makes the return a lot less
So the headline 12℅ return doesn't look so appealing
The distinction between buying on the PM and selling vs buying on the SM and selling and whether that means you are 'trading', is interesting. A large number would fall under the former. I think FS only mentions the possibility of being defined as trading in the latter scenario. We are all going on the platforms interpretation, so the former wouldn't be considered trading?
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mikes1531
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Post by mikes1531 on Jan 3, 2017 22:28:25 GMT
The distinction between buying on the PM and selling vs buying on the SM and selling and whether that means you are 'trading', is interesting. A large number would fall under the former. I think FS only mentions the possibility of being defined as trading in the latter scenario. We are all going on the platforms interpretation, so the former wouldn't be considered trading? Only until HMRC decide they don't like the resulting income tax 'leakage' -- and in that situation you need to hope they don't decide you're a good example to be used as their test case! If you're not the test case, you might still be affected by the case's result, but the revised interpretation might not take effect retroactively -- or even immediately.
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mikes1531
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Post by mikes1531 on Jan 3, 2017 22:45:20 GMT
So let me get this straight You can invest £1m on the PM receive 12% + say 3% bonus for large investment, plus occasional cash back incentive hold for a few months and then sell before the last 30 days on the SM and you have 12%+pa return... ...no income tax liability... Wow! : Unfortunately for BHs, it's not quite so good. If you read FS's description of how bonuses work in this situation ( "Incentive bonuses will only be paid to the original purchaser at the original rate on loan completion"), you'll find that they evaporate if a part is sold before maturity. So the BH would have to choose between a 15% return that's taxable or a return of something like 10% that appears not to be (because a discount is most likely necessary in order to sell a loan with less than about 60 days to run). Even if they're a higher-rate taxpayer, the lost return is close to what they'd lose to tax, so there isn't much to be gained by this strategy, and if it increases the chance that HMRC would want to take a close look at their affairs they might prefer to pay the tax rather than risk an investigation.
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