littleoldlady
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Running down all platforms due to age
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Post by littleoldlady on Aug 3, 2017 7:06:30 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. If the market was perfect the net yield would be exactly the same on all platforms. Since it isn't perfect nobody can tell you which will be higher, and anyone who says he can is either a charlatan or is deluded. (Many times his prediction will turn out to be correct which will feed his delusion). This discussion is about which risk category to put into one's ISA, and IMO IFISAcava has correctly summarised it above, and it depends on your marginal tax rate.
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metoo
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Post by metoo on Aug 3, 2017 16:30:48 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. If the market was perfect the net yield would be exactly the same on all platforms. Since it isn't perfect nobody can tell you which will be higher, and anyone who says he can is either a charlatan or is deluded. (Many times his prediction will turn out to be correct which will feed his delusion). This discussion is about which risk category to put into one's ISA, and IMO IFISAcava has correctly summarised it above, and it depends on your marginal tax rate. Apologies for being thick here. I'm just trying to understand the reasoning, not predict actual returns. I am assuming a diversified portfolio of loans on each platform though, so I supposed the loss is set against the income on the platform first? I did run some figures on paper and in a spreadsheet, but still don't reach the same conclusion yet. IFISAcava are you basing this on capital losses in excess of [all income on platform in the year]+[marginal rate of tax], or are we only talking about a capital loss greater than the marginal tax rate as a percentage of the income (which reduces but does not eliminate the income on the platform)?
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IFISAcava
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Post by IFISAcava on Aug 3, 2017 16:50:42 GMT
If the market was perfect the net yield would be exactly the same on all platforms. Since it isn't perfect nobody can tell you which will be higher, and anyone who says he can is either a charlatan or is deluded. (Many times his prediction will turn out to be correct which will feed his delusion). This discussion is about which risk category to put into one's ISA, and IMO IFISAcava has correctly summarised it above, and it depends on your marginal tax rate. Apologies for being thick here. I'm just trying to understand the reasoning, not predict actual returns. I am assuming a diversified portfolio of loans on each platform though, so I supposed the loss is set against the income on the platform first? I did run some figures on paper and in a spreadsheet, but still don't reach the same conclusion yet. no - offset again all P2P income in general, can be any platform.
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IFISAcava
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Post by IFISAcava on Aug 3, 2017 16:53:42 GMT
If the market was perfect the net yield would be exactly the same on all platforms. Since it isn't perfect nobody can tell you which will be higher, and anyone who says he can is either a charlatan or is deluded. (Many times his prediction will turn out to be correct which will feed his delusion). This discussion is about which risk category to put into one's ISA, and IMO IFISAcava has correctly summarised it above, and it depends on your marginal tax rate. Apologies for being thick here. I'm just trying to understand the reasoning, not predict actual returns. I am assuming a diversified portfolio of loans on each platform though, so I supposed the loss is set against the income on the platform first? I did run some figures on paper and in a spreadsheet, but still don't reach the same conclusion yet. IFISAcava are you basing this on capital losses in excess of [all income on platform in the year]+[marginal rate of tax], or are we only talking about a capital loss greater than the marginal tax rate as a percentage of the income (which reduces but does not eliminate the income on the platform)? platform doesn't matter tax relief is calculated as follows: In an IFISA, you save your marginal rate of tax Outside of an IFISA, you save your capital loss (assuming you have enough P2P interest earned outside of an ISA to offset capital loss against) Thus outside beats inside if your capital loss is greater than your marginal rate. I am not an IFA, so there are probably other nuances of what can be offset against what and in what tax year, but the above is the big picture when deciding on using an IFISA **EDIT** see below - this isn't right - metoo is right, capital is offset against interest, not actual tax paid.
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IFISAcava
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Post by IFISAcava on Aug 3, 2017 17:50:46 GMT
actually, I think that isn't quite right.... hold on, examples to follow...
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IFISAcava
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Post by IFISAcava on Aug 3, 2017 18:00:17 GMT
So perhaps it is even more of a red herring than I thought. The capital loss is offset against pre-tax interest, not actual tax.
Examples for 40% taxpayer with £1000 interest:
A) No capital loss:
IFISA earnings £1000
tax due: £0
net income £1000
Non-IFISA earnings £1000
tax due: £400
net income £600
B) With £500 capital loss:
IFISA earnings £1000
tax due: £0
capital loss: £500
net income £500
Non-IFISA earnings £1000
capital loss: £500
net income: £500
Tax due: £200
post-tax income £300
C) With £1000 capital loss
IFISA earnings £1000
tax due: £0
capital loss: £1000
net income £0
Non-IFISA earnings £1000
capital loss: £1000
net income: £0
Tax due: £0
post-tax income £0
D) with £1500 capital loss
IFISA earnings £1000
tax due: £0
capital loss: £1500
net income -£500
Non-IFISA earnings £1000
capital loss: £1500
net income: -£500
Tax due: -£200 (offset against interest on another platform)
post-tax income £-300
So if you make ANY profit you are better on in an IFISA, and any loss better off outside, whatever tax rate you pay...
Any comments? Important we get this right!
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IFISAcava
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Post by IFISAcava on Aug 3, 2017 18:13:40 GMT
The bottom line for me is:
1) put as much as possible inside an IFISA
2) don't expose yourself to catastrophic losses by diversifying
3) outside of IFISA is only better if you think there's a high chance of making a loss, averaged across all platforms. if you have an average positive return then you'll pay less tax in an IFISA.
4) The trade off is that if you wanted to put the higher risk/higher return platforms outside of the ISA in case they made a net loss, and thus giving yourself the chance to minimise your losses, you'll likely most of the time be paying more tax - i.e. its like an insurance premium that the government takes off you.
But comments welcome!
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metoo
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Post by metoo on Aug 3, 2017 19:46:05 GMT
Thanks for going into this IFISAcava . I ran figures with the same sum in each of: - a 12% rate, with 6% losses - a 5% rate with no losses I compared swapping which was the ISA. It came out best to have the higher income after losses in the ISA. The assumed losses exceed the tax rates but don't exceed the platform income. I can't predict which accounts will end up paying the most, or making a net loss, but as I have to believe I will usually make a net gain, I envisage putting the accounts I hope to pay most taxable income after losses in my ISAs. As the greater tax saving will enhance returns in good years, that should help overall returns. YMMV. There are several factors in the ISA decision, eg level of commitment to / confidence in a platform. I agree with IFISAcava 's last summary. |
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