littleoldlady
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Post by littleoldlady on Jul 31, 2017 13:20:53 GMT
Part of my diversification strategy is risk diversification. So I have some relatively risky high interest platforms (nowadays mostly MT*) and some relatively safer lower interest platforms. I was pondering which platform to use for my current year's ISA. If there are no losses it is simple - use the one with the highest interest rate. However losses in an ISA cannot be offset for tax against interest earned in a non-ISA account. So would it be better to keep the high risk platforms outside of the ISA?
* Yes, I realise that this conflicts with my platform diversification but I am running out of platforms I trust.
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archie
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Post by archie on Jul 31, 2017 13:37:54 GMT
High risk / high interest, lots of late or default loans I'd rule out.
Low interest I'd rule out as it seems a waste of a good tax allowance.
High interest but currently low defaults would be my choices.
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IFISAcava
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Post by IFISAcava on Jul 31, 2017 18:07:36 GMT
I think the offset is a bit of a red herring, for the following reasons.
if loan defaults outside of an ISA you will pay a bit less tax elsewhere
if it defaults in an ISA, you haven't paid any tax so you can't offset it - but unless you are losing capital equivalent to at least the same as the saved tax you are still ahead inside the ISA even taking into account the inability to offset.
Thus, as a 40/45% tax payer, you need to lose 40/45% of interest to defaults before you're worse off.
I would suggest that as a 40/45% tax payer, if you are losing that much of your interest to defaults, you're in the wrong place whether inside or outside of an ISA.
Also, the higher the interest, the higher the capital defaults would need to be to reach the 40/45% threshold. So that would suggest higher risk/higher interest loans are just as appropriate as lower ones for an ISA.
The calculations are probably closer for a 20% taxpayer.
The calculations are also modified if the ISA has an additional fee to the non-ISA, and I think those are best avoided.
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littleoldlady
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Post by littleoldlady on Jul 31, 2017 22:05:25 GMT
I think the offset is a bit of a red herring,. A simple example: A portfolio consists of £100 at 12% and £400 (4 x £100) at 5% with £100 in an ISA. There are losses of £20 in the 12% account (£8 net because all interest is received before the capital loss). Tax is 40%. If the 12% loan was in the ISA There is a loss of £8 in the ISA and a gain of £20 in the non-ISA or £12 after tax so an overall gain of £4. If a 5% loan was in the ISA there is a gain of £5 in the ISA and interest of £27 in the non-ISA, less £20 loss so a taxable gain of £7 or after tax £4.20 so a total return of £9.20. Am I missing something?
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IFISAcava
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Post by IFISAcava on Aug 1, 2017 2:11:09 GMT
I think the offset is a bit of a red herring,. A simple example: A portfolio consists of £100 at 12% and £400 (4 x £100) at 5% with £100 in an ISA. There are losses of £20 in the 12% account (£8 net because all interest is received before the capital loss). Tax is 40%. If the 12% loan was in the ISA There is a loss of £8 in the ISA and a gain of £20 in the non-ISA or £12 after tax so an overall gain of £4. If a 5% loan was in the ISA there is a gain of £5 in the ISA and interest of £27 in the non-ISA, less £20 loss so a taxable gain of £7 or after tax £4.20 so a total return of £9.20. Am I missing something? You're quoting the scenario where your capital loss is greater than 40% of interest earned. I don't think that should happen very often in a diversified P2P portfolio held medium to long term.
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IFISAcava
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Post by IFISAcava on Aug 1, 2017 2:19:34 GMT
Also, if you work the scenarios out with losses less that 40% of interest, having the 12% in the ISA will result in better returns than having the 5% in the ISA.
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littleoldlady
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Post by littleoldlady on Aug 1, 2017 9:51:54 GMT
You're quoting the scenario where your capital loss is greater than 40% of interest earned. I don't think that should happen very often in a diversified P2P portfolio held medium to long term. 40% of 12% is only 4.8%, reducing the net return to 7.2%. If this is really something 'that should not happen' it seems very generous. I have two platforms where losses have exceeded all time interest. Maybe I have just been unlucky, but there must be a reason why borrowers cannot borrow at less than 12%+margin+fees (over 20% in some cases) when bank rate is 0.25%.
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IFISAcava
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Post by IFISAcava on Aug 1, 2017 14:18:01 GMT
You're quoting the scenario where your capital loss is greater than 40% of interest earned. I don't think that should happen very often in a diversified P2P portfolio held medium to long term. 40% of 12% is only 4.8%, reducing the net return to 7.2%. If this is really something 'that should not happen' it seems very generous. I have two platforms where losses have exceeded all time interest. Maybe I have just been unlucky, but there must be a reason why borrowers cannot borrow at less than 12%+margin+fees (over 20% in some cases) when bank rate is 0.25%. sure - on some platforms some years losses may exceed 40/45%. But overall, across platforms, I don't think my losses ill be greater than 40/45% of interest in the long term. if I did, I wouldn't use an IFISA as there would be no tax saving. And most platforms losses that are published, that I have seen anyway, show much lower rates of losses than the 4.8% for a 40%er or 5.4% for a 45%er. So anyway, I am converting my S&S ISAs to IFISAs, and reinvesting in S&S outside the wrapper with the aim of utilising fully the annual capital gains allowance and the tax free dividend allowance, as I think this is the most tax efficient use of the ISA wrapper for now.
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littleoldlady
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Post by littleoldlady on Aug 1, 2017 15:28:13 GMT
IFISAcava Anyway we agree that the break even point is if capital losses exceed 20/40/45% of interest earned? That's a useful rule of thumb for me; thanks. One of my accounts is for a 20% -er, and on that one the break even point of 2.4% on 12% loans looks unpalatable.
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metoo
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Post by metoo on Aug 1, 2017 21:26:07 GMT
Interesting discussion. Wouldn't it be best to use ISAs for the platforms you expect to have the highest rates of taxable income net of losses averaged over the longer term? Returns could be volatile so over shorter periods the return could be low or negative, other times high, but presumably you don't invest where you expect to come out with less than the safe FSCS return? Even the low risk platforms may incur losses in a recession.
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IFISAcava
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Post by IFISAcava on Aug 2, 2017 8:13:44 GMT
IFISAcava Anyway we agree that the break even point is if capital losses exceed 20/40/45% of interest earned? That's a useful rule of thumb for me; thanks. One of my accounts is for a 20% -er, and on that one the break even point of 2.4% on 12% loans looks unpalatable. yes, agreed! So for a 20% tax payer, I'd think once of the low risk/low return (low return relative to other IFISAs, not relative to cash ISA) with provision fund and no extra ISA charge would be the way to go.
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littleoldlady
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Post by littleoldlady on Aug 2, 2017 16:49:18 GMT
Oh dear!. I am still prevaricating and the year is slipping by. For this year's allowance, of the ISAs available I discount LLI and PL because I already money from previous years waiting for loans, and K and Goji because they are bonds, and FS and Abl because I have lost too much due to their poor DD (that's IMO). If MT produce their's soon I will probably go for that, although I am already overweight on them so will try to run down the non-ISA side at the same time.
Is there anyone I have overlooked?
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pom
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Post by pom on Aug 2, 2017 18:00:32 GMT
Oh dear!. I am still prevaricating and the year is slipping by. For this year's allowance, of the ISAs available I discount LLI and PL because I already money from previous years waiting for loans, and K and Goji because they are bonds, and FS and Abl because I have lost too much due to their poor DD (that's IMO). If MT produce their's soon I will probably go for that, although I am already overweight on them so will try to run down the non-ISA side at the same time. Is there anyone I have overlooked? Running down your non-ISA side at MT isn't likely to be a problem...grabbing loans to fill your ISA could be 
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IFISAcava
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Post by IFISAcava on Aug 2, 2017 23:53:31 GMT
Interesting discussion. Wouldn't it be best to use ISAs for the platforms you expect to have the highest rates of taxable income net of losses averaged over the longer term? Returns could be volatile so over shorter periods the return could be low or negative, other times high, but presumably you don't invest where you expect to come out with less than the safe FSCS return? Even the low risk platforms may incur losses in a recession. yes but only if your losses are less than your marginal rate of tax. as argued above, if the losses are bigger, the tax relief available outside an ISA is better so it is more correctly stated that: higher rates of taxable income net of losses are better outside of an ISA if your expected capital losses are a higher proportion of your income than your marginal rate of income tax.and higher rates of taxable income net of losses are better inside an ISA if your expected capital losses are a lower proportion of your income than your marginal rate of income tax.
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metoo
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Post by metoo on Aug 3, 2017 0:34:46 GMT
IFISAcava Thanks for your reply. I'm not managing to get my head round this. Can you give another worked example? My naive assumption was that on average the higher risk platform will usually yield more than the lower risk platform even after capital losses. I then thought I will pay tax on the income net of losses, so the tax will be higher on the riskier platform than the lower risk one. I thought the loss gets deducted before the tax is charged. Is that wrong / too simplistic. I haven't had to deal with losses on a tax return yet. I can see that if losses exceed income that would give an allowance to set against other income but I hope that won't (often) happen.
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