IFISAcava
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Post by IFISAcava on May 22, 2017 22:57:10 GMT
For higher/additional tax payers, all of the above is massively outweighed by the 40/45% tax savings. The lack of offset of losses is I think more of a technical issue and a bit of a red herring; even a big capital loss wont come close to negating that tax saving (assuming you are suitably diversified - and if you're not then you're in trouble whether inside or outside of an ISA) Fees are a bigger issue I think - some platforms are charging higher fees on ISAs that could take away a lot of the tax saving v a non-ISA p2p offering. The 40% tax saving is only on the interest, which in itself is a % of the capital. So £1000 capital at 10% interest is £100, tax saving 40% on £100 interest is £40 or 4% of the capital
Where as a capital loss is a % of the capital and could easily exceed 4%Of course, but a) you should be well diversified so that a capital loss should rarely if ever be 4% pa of what you have invested and b) capital loses will be the same inside or outside an ISA, its just that your tax saving inside an ISA versus what it would have been outside an ISA is a bit less if you make a capital loss. It will still be a saving. And you are losing your capital either way. Put another way - if you really think you are going to lose capital equivalent to the tax you pay (nearly half your interest) you're either very unlucky, or you should change your strategy. Simply put (and ignoring negative effects of compounding in bad years and positive effects in good years) you'd have to lose unrecoverable capital equivalent to 40/45% of your interest every year to make yourself better off outside an ISA.
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IFISAcava
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Post by IFISAcava on May 22, 2017 22:58:08 GMT
That's what I mean. You don't lose anything by having your P2P investment in an ISA because you never pay the initial tax to begin with. Quite right. There seems to be a misunderstanding that putting investments inside an ISA results in the loss of a valuable tax relief from being able to utilise losses. Investments within an ISA are tax free. That means that no tax at all is paid on gains/interest. In other words, your effective rate of tax is zero. For unwrapped to be better, the effective rate of tax would therefore need to be negative. That doesn't happen with CGT relief or tax relief on P2P interest. If your losses are larger than your gains, you pay no tax (just like in an ISA), and if you subsequently make gains that lead you to break even, then you pay no tax up to that point (just like in an ISA). Beyond breakeven, your interest/gains are taxable (unlike in an ISA). So holding these investments unwrapped is at best equivalent to doing so within an ISA, but with the added annoyance of record keeping and reporting to HMRC. Where things do get a bit more uncertain is when you hold some investments wrapped and some unwrapped. If you make a net loss within your ISA and a net gain in your unwrapped investments, you would have been better off not having the ISA. Therefore it is best to use the ISA preferentially for investments less likely to suffer a capital loss.good point however they are lower returns usually and thus less tax saving... swings and roundabouts?
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mason
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Post by mason on May 23, 2017 6:01:34 GMT
Where things do get a bit more uncertain is when you hold some investments wrapped and some unwrapped. If you make a net loss within your ISA and a net gain in your unwrapped investments, you would have been better off not having the ISA. Therefore it is best to use the ISA preferentially for investments less likely to suffer a capital loss.good point however they are lower returns usually and thus less tax saving... swings and roundabouts? It is not necessarily the case that lower risk loans have lower returns. Risk and rate are not very well correlated in the world of P2P. Rate seems to be more closely linked with supply/demand. Within the loans I hold at, say 12% AER, there are some that I consider riskier than others. I would also say that I've seen lower rate loans that equally, if not more, risky than some of those I hold at higher rates. If you are in the situation where you put lower *rate* loans into your ISA and you do not suffer any capital losses, then you would end up paying tax on more of your P2P income. However, if you do suffer losses, and they are outside of your ISA, then the reliefs generated will swing the pendulum the other way. Personally, I wouldn't hold loans paying <10% in an ISA until I had all of my higher rate loans safely wrapped. Then again, I hold very little in the way of loans paying <10%.
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Greenwood2
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Post by Greenwood2 on May 23, 2017 6:44:13 GMT
But you may have effectively 'wasted' some of your tax advantage on your ISA money if you put it in P2P loans and your losses are substantial. The question is, is it better to put your ISA money somewhere else where you will get the full tax advantage? And just use the offsetting of bad debt on your P2P loans.
In the end it depends how confident you are in any particular platform to keep bad debts low and rates high enough to make it attractive.
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mason
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Post by mason on May 23, 2017 7:07:37 GMT
But you may have effectively 'wasted' some of your tax advantage on your ISA money if you put it in P2P loans and your losses are substantial. The question is, is it better to put your ISA money somewhere else where you will get the full tax advantage? And just use the offsetting of bad debt on your P2P loans. That's true, and the obvious alternative asset classes to wrap in an ISA are equities and high yield bonds. I would tend to prioritise bed & ISAing these above P2P loans up to a point (taking into account the generous CGT allowance for equities for example). Given where current valuations are on equities, and where interest rates are on bonds, this might be a time where I'd favour putting P2P investments into an ISA over other asset classes, but fortunately I don't have that dilemma since I already hold the vast majority of these investments within a S&S ISA. And of course the investor plays a part in minimising bad debts through loan selection. Another key factor is the platform's recovery process, which is perhaps where it can make a significant contribution to minimising losses.
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stevio
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Post by stevio on May 23, 2017 7:28:48 GMT
The 40% tax saving is only on the interest, which in itself is a % of the capital. So £1000 capital at 10% interest is £100, tax saving 40% on £100 interest is £40 or 4% of the capital
Where as a capital loss is a % of the capital and could easily exceed 4%Of course, but a) you should be well diversified so that a capital loss should rarely if ever be 4% pa of what you have invested and b) capital loses will be the same inside or outside an ISA, its just that your tax saving inside an ISA versus what it would have been outside an ISA is a bit less if you make a capital loss. It will still be a saving. And you are losing your capital either way. Put another way - if you really think you are going to lose capital equivalent to the tax you pay (nearly half your interest) you're either very unlucky, or you should change your strategy. Simply put (and ignoring negative effects of compounding in bad years and positive effects in good years) you'd have to lose unrecoverable capital equivalent to 40/45% of your interest every year to make yourself better off outside an ISA.
The lack of offset of losses is I think more of a technical issue and a bit of a red herring; even a big capital loss wont come close to negating that tax saving (assuming you are suitably diversified - and if you're not then you're in trouble whether inside or outside of an ISA)If your comparing one loan in an ISA to the same loan outside an ISA, which your statement that the tax benefit of an ISA outweighs the offset of losses outside an ISA was, diversification wouldn't apply The capital loss is the same inside and outside an ISA yes, but the amount capital loss you can claim is not Good luck to you if you think you can avoid capital loss simply by diversifying, 'changing your strategy' and are just 'unlucky' if you do
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Post by gidoppp01 on May 23, 2017 7:59:54 GMT
Precisely: I have 9 IFISAs. Main issue is that my favourite platforms don't have them yet. Then again that makes me EVEN MORE diversified (by platform anyway). Amazing! 9 IFISAs. I don't have time to build up 9 years subscription on 9 different ISAs.
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justme
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Post by justme on May 23, 2017 8:31:07 GMT
But you don't have to wait 9 years. Open one isa and providing that other isas accept transfers you can fund 9 of them in the same year moving money from your original one.
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archie
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Post by archie on May 23, 2017 8:35:58 GMT
But you don't have to wait 9 years. Open one isa and providing that other isas accept transfers you can fund 9 of them in the same year moving money from your original one. For a transfer from an ISA opened in the current tax year it has to be the complete amount. A transfer from any previous tax year you can split.
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IFISAcava
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Post by IFISAcava on May 23, 2017 10:39:16 GMT
Of course, but a) you should be well diversified so that a capital loss should rarely if ever be 4% pa of what you have invested and b) capital loses will be the same inside or outside an ISA, its just that your tax saving inside an ISA versus what it would have been outside an ISA is a bit less if you make a capital loss. It will still be a saving. And you are losing your capital either way. Put another way - if you really think you are going to lose capital equivalent to the tax you pay (nearly half your interest) you're either very unlucky, or you should change your strategy. Simply put (and ignoring negative effects of compounding in bad years and positive effects in good years) you'd have to lose unrecoverable capital equivalent to 40/45% of your interest every year to make yourself better off outside an ISA.
The lack of offset of losses is I think more of a technical issue and a bit of a red herring; even a big capital loss wont come close to negating that tax saving (assuming you are suitably diversified - and if you're not then you're in trouble whether inside or outside of an ISA)If your comparing one loan in an ISA to the same loan outside an ISA, which your statement that the tax benefit of an ISA outweighs the offset of losses outside an ISA was, diversification wouldn't apply The capital loss is the same inside and outside an ISA yes, but the amount capital loss you can claim is not Good luck to you if you think you can avoid capital loss simply by diversifying, 'changing your strategy' and are just 'unlucky' if you do I think I can minimise the chances of losing more than the ISA tax savings every year by diversification, yes. I don't think I can "avoid capital loss", no.
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IFISAcava
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Post by IFISAcava on May 23, 2017 11:01:08 GMT
But you may have effectively 'wasted' some of your tax advantage on your ISA money if you put it in P2P loans and your losses are substantial. The question is, is it better to put your ISA money somewhere else where you will get the full tax advantage? And just use the offsetting of bad debt on your P2P loans. In the end it depends how confident you are in any particular platform to keep bad debts low and rates high enough to make it attractive. I think you need to look at absolute savings in the ISA wrapper not relative. Saving the tax on 12% p2p returns is a huge starting £ advantage over other alternatives that will need quite some whittling down from lost tax advantages of writing off capital losses.
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