Our friends at Orca Money look at the taxation of peer-to-peer (P2P) loans. Given that our own P2P lenders have averaged a gross yield of over 8 per cent in over three and a half years, taxation is something lenders should be aware of.
Unless, that is, lenders hold their loans via an Individual Sacings Account (ISA). In which case, all the income would be tax-free. For someone investing the full £20,000 annual allowance, that's over £1,600 per annum, completely free of all tax.
Peer to peer lending is taxable as income. This means that you are required and responsible for declaring the tax on interest earned from P2P investments. Depending on your level of investment, there's a chance you will not incur tax on your returns due to the Personal Savings Allowance, enacted April 2016 (more below). Here are the key facts to bear in mind when considering taxation in P2P lending:
Interest is taxable as income
Investors are required to declare tax on interest earned in their annual tax return
Investors can deduct eligible bad debt (P2P losses)
Investors can take advantage of their Personal Savings Allowance
Investors can shelter returns from tax by holding loans in an Innovative Finance ISA
Capital Gains Tax (CGT) is unlikely but can be incurred if you buy and sell the same loan part – gains may then be taxed*
*Secondary market transactions (where loans can be bought and sold) are considered to be purchases/sales of the original loan, which is deemed "simple debt". As such, they are not usually liable for CGT.
We currently have one A-rated, fixed-term loan on site, with a fixed rate of 8 per cent and a term of three years; it is presently 42per cent bid – and will close when filled. There's another A-rated loan on site, with a five-year term, and an indicative yield of 8 per cent (but the final yield will be determined by auction). It's 36 per cent filled after just one day.
In addition to new loan offerings, our secondary loan market, offering existing loans for sale by lenders, is available to registered Money&Co. users.
All loans can be held, tax-free, in an Innovative Finance Individual Savings Account, or Innovative Finance ISA.
Risk: Security, Access, Yield
Do consider not just the return, but the security and the ease of access to your investment.We write regularly about these three key factors. Here's an earlier article on security, access and yield.
If you haven't made a loan via Money&Co. before, please read the risk warnings and the FAQ section. You may also wish to consult a financial adviser before making an investment. Capital is at risk, once loaned.