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New tax reliefs for P2P lending could give individual investors a boost


Measures introduced in the latest Finance Bill 2016 to offer tax relief on Peer To Peer (P2P) loans are a welcome move that could give individual investors higher returns on their savings, according to  London Chartered Accountants Blick Rothenberg.

Robert Pullen, Personal Tax Manager at Blick Rothenberg, says: “P2P lending has been growing in popularity amongst individual investors searching for higher returns on their savings. Until recently, there were no specific tax rules in relation to P2P investments but the growing interest has been acknowledged by the Government, with new tax reliefs for losses introduced in the latest Finance Bill 2016.”
The return on the P2P loan is treated like interest, in the same way as bank interest received on a savings account. This broadly means that the first GBP1,000 for basic rate tax payers, or GBP500 for higher rate tax payers, is exempt from income tax as this falls within the new Personal Savings Allowance. In addition, the interest can be covered by the GBP11,000 personal allowance if not otherwise used, while a GBP5,000 savings rate of tax at 0 per cent is available, again if not otherwise used, and any interest received above the allowances are taxed to income tax at 20/40/45 per cent.
Pullen says: “The interest is paid gross to the investor by the P2P platform, meaning no tax is collected at source. This is the same as bank and building societies paying interest gross on savings accounts from 6 April 2016.
“Any fees levied by the P2P lender are not tax deductible from the interest received, being the same treatment for any bank fees.”
From 6 April 2016, a new ‘Innovative Finance ISA’ (IFISA) is available to allow individuals to make P2P loans through an ISA, which means that any returns are tax-free, just like regular savings accounts held within a cash ISA. 
Pullen says: “When the investor withdraws their money from the P2P loan, the repayment of the principal amount invested is not taxed.  However, some P2P platforms also allow P2P loans to be bought and sold amongst investors which could mean an investor realising a capital gain.  In this situation, the capital gain should be exempt from capital gains tax as a loan is generally not a chargeable asset.
“Like any investment, it is possible to lose money on the P2P investment, say if the borrower defaults on the loan repayment. The recently published Finance Bill 2016 contains a new provision (effective from 6 April 2015) which allows for losses incurred on P2P loans to be offset against any interest received on P2P loans in the year of loss. 
“If the individual has not received sufficient interest to use the full loss, the unused loss can be carried forward and offset against future P2P interest received in the next 4 tax years. In order for the tax relief to be available, a key condition is that the P2P loan must have been made through an ‘operator’ who is authorised under the Financial Services and Markets Act 2000 to operate an electronic system in relation to lending.
“Prior to 6 April 2015, tax relief was generally not available on P2P loans, and these latest measures demonstrate a recognition by the Government of how popular this form of saving has become. 
 “It is encouraging that losses can be offset against interest income, rather than it being a capital loss, which you would intuitively expect to be the case in this type of situation. It is also noteworthy that there is no equivalent relief for the situation where an individual loses money in their savings account with their bank (subject to the Financial Services Compensation Scheme).
“Whilst the latest measures to offer tax relief on P2P loans are welcomed and generous, the investment considerations always have to be balanced, and where appropriate, specialist advice taken."

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