Impact on Bondora returns - UK tax rules

My position is hugely different from the one that you are seeing.

In my case default capital value is €x. Net profit or loss for all loan sales since start of year is about €x/3 loss. Interest and fee income is about €22x over about 18 months before tax. Even if I use higher rate tax that would be very positive using your calculation. My first investment was in November 2012, first repayment in December 2012.

I noticed in a batch of loans that I've been selling because they are more late than I want the interest income has been greater than the discounts I needed to sell the loan. I have not been collecting systematic data but it is entirely possible that after allowing for tax the combined result is that overall the loans that I have sold to avoid default have been net profitable for me. That may also be true if I limit it to only looking at those which I have sold at a discount.

If I include the loans that have gone on to default I think that it is likely that they will also become profitable, or if combined with those sold will overall be profitable. Most are making regular full payments including penalties, although some are making only small payments occasionally.

With this sort of reasoning it is good to see that Bondora has gradually been increasing the average time it takes before loans default. This makes it more likely that for each loan the interest will cover the capital loss if a sale before default is carried out.

My current position for all loans that I have sold since the start of the year is a capital loss of about 0.9% before I allow for interest earned. Many of those loans were sold just because of low interest rates, not default risk. Those low rate sales were often had a small capital loss, though many were sold at a profit. The default risk loans tend to need a higher discount because I now sell later than I used to. Previously I sold relatively early and usually at a profit. It is not yet clear to me whether the extra income from those that I do not sell is sufficient to cover the extra cost of selling some loans later. Nor is it clear to me that the extra time cost of more monitoring of late loans is worthwhile.

I did quite rapidly increase my loan book size while the low bid wins system was working and those loans are so new that most have not yet had time to move to possible default. Amount invested is now about 3-4 times larger than before low bid wins. I do not think that the new loan results will differ sufficiently from older loans to change my overall picture much. Monthly interest payments before tax are currently about three times my total defaulted loan capital value.

Bondora's annualized net return on investment for me varies between 26% and 29% depending on time of month. Currently about 27%. My own 100% loss from default Euro XIRR is about 17.5% and continues to rise by 1-2% a month towards whatever value it settles at. Rank in investors who have more than €10000 invested for more than a year varies in the range between 10 and 40 depending on time of month. Currently 27, or 730 among all investors,  Exchange rate variations mean that my Pound XIRR has been falling recently. It's currently about 13%, down from a peak of about 15.5%. Average interest rate is about 25.7%. All before tax.

You limited company can't use an ISA. If you have an ISA available that might be sufficient reason to wait, then move loans into the ISA if you have sufficient past years ISA money available to do it. Assuming that Bondora does support ISA use it will make a huge difference for UK investors.

I see you both talk about defaulters making payments, but in my case only one of mine has paid anything since defaulting.   I only started with Bondora 10 months ago, so I am hoping to see some more payments as time goes on.   I did get the impression that the collection agency didn't achieve much so I hope that in house collection will be more effective and produce earlier results.

I too was adding money regularly until a month ago, since when I have difficulty using the repayments.   I took on selected B+ loans, however I have ceased doing that as 50% of those reaching their first payment date are overdue.

jamesfrance, you'll need to allow about two months before there's much sign of repayments and a few months longer before you get to see a more final state where those who can pay are forced to pay using the law. Not always but that's what you should expect.

One of mine who initially defaulted had a bailiff visit and is now no longer classed by Bondora as in default. Instead they have paid in an arrangement and recently increased the arrangement payments so it appears that they will fully repay including all penalties. I sold much of my holding of this loan when it changed from default to non-default state, which cost me money in reduced recovery income but reduced my risk. I don't know whether Bondora still changes state like this, I've only seen it happen once.

Overall I'm quite pleased with the collection results. Not pleased enough not to sell first if I can get a decent price.

Like you I pay particular attention to loans where not even the first payment may be made, even more so if the borrower is young and/or may lack assets for a bailiff to seize. I'm a bit more aggressive in discounts than you but given the default rate of those I sold at highest discounts I'm content with the prices.

Aftermarket pricing in part depends on round numbers so that searches will find the loans, in part on competition between sellers and in part on the details of the loan. If I'm really keen to sell I try to ensure that I go beyond the various 5% boundaries in return to buyer number. 30.1% is more likely to sell than 29.9% because more searches will find it, even though those have to be done by a human scanning the loans rather than by an explicit search.

I've just started pulling together data for my 2015 UK SA tax submission.  I have looked at HMRC's guidance regarding making CGT loss relief claim in respect of losses on loans, but the losses that are allowed to be claimed seem to be limited and exclude loans that are not made to a trade or to borrower outside the UK.  This restriction would appear to prevent UK investors from making any CGT loss relief claims on bad loans (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/323727/hs296.pdf).  

Has anyone researched CGT loss relief this or obtained specific advice on the matter?

If you are lending as an individual (not through a company) you have looked in the right place and your understanding is correct. Under the current rules, there is no relief of any kind for losses on loans to overseas borrowers.

Indeed. It's also worth noting that the trade must not consist of or include the lending of money.

It will be interesting to see to what extent these restrictions will be repeated in the new loss relief against income, for which we should see draft legislation later this year.