Peer to peer lending
Guidance for individuals investing in peer to peer loans, reporting interest and claiming losses from loans that default.
Peer to peer loans are an alternative investment providing opportunities for individuals to lend directly to other people or businesses without using a bank.
Peer to peer lending operates on a ‘many to many’ lending model through internet intermediaries, also called a lending platform, who arrange and manage the loans. The platforms are regulated and authorised by the Financial Conduct Authority (FCA), they put lenders with money in touch with borrowers.
The advantage of peer to peer loans for lenders is that they:
- can generate higher interest rates that exceed the interest that could be earned from banks and other financial institutions
- give borrowers an alternative to the finance which they may get from standard financial intermediaries
How peer to peer lending works
Lenders place their money with a peer to peer platform which is then lent to lots of different borrowers as many small loans. Each borrower borrows small amounts from many different lenders to make up the full loan they need. The platform will collect the repayments of interest and capital from each borrower and pass them to the lenders.
The interest received from peer to peer loans is taxable in the same way as any other interest received. Interest payments received from peer to peer loans may be paid either with or without deduction of tax. If someone receives interest without deduction of tax, they will need to notify HM Revenue and Customs (HMRC) of the income and to pay the correct amount of tax.
Claiming tax relief on unpaid loans
If a peer to peer loan isn’t repaid the lender can set the loss they suffer on the loan against the interest they receive on other peer to peer loans before the income is taxed.
Tax relief is available to peer to peer lenders who:
- are liable to UK Income Tax on their peer to peer income
- make loans through peer to peer lending platforms that are authorised by the FCA
- are the legal lender at the time when its agreed that the loan has gone bad
When relief can be obtained
Tax relief applies when there is no reasonable prospect of the peer to peer loan being repaid, it doesn’t apply to late payment.
The amount of relief available is the peer to peer loan still outstanding from the borrower, less repayments already received.
Relief for bad debts on peer to peer loans can only be set against interest that the lender receives on other peer to peer loans, it cannot be used against any other form of income.
If a debt is recovered after relief is given
If a lender has received relief for a bad debt on a peer to peer loan that is repaid at a later date (for example if the borrower manages to pay late, or if there is recovery of assets), the amount is treated as new peer to peer income of the lender.
When the relief will apply
Peer to peer lenders who suffer bad debts on peer to peer loans from 6 April 2015 will be able to claim relief in their tax returns.
Peer to peer lenders who suffer bad debts on peer to peer loans from 6 April 2016 and relief conditions are met, may also set these bad debts against interest received on other peer to peer loans made through the same platform without needing to make a claim.
Further information can be found in HMRC’s guidance on Income Tax relief for irrecoverable loans.
How to claim tax relief in a tax return
Peer to peer interest should be entered on form SA101 Additional Information under Other UK income, Interest from gilt-edged and other UK securities, deeply discounted securities and accrued income profits.
When completing the SA101 form enter the:
- box 3 - interest received gross less any bad debt relief from all platforms
- box 1 - interest received net less any bad debt relief from all platforms
- box 2 - full amount of tax deducted from the interest
Any excess relief for peer to peer bad debts available to carry forward does not need to be included on the tax return, but the lender should keep records of any carry forward relief in order to make a correct and complete claim in a tax return for a future period.
The Self Assessment Tax Returns Manual gives more detail about requirements for keeping records to complete tax retuurns.
Claiming relief outside a tax return
From 6 April 2016, lenders who don’t need to submit a tax return will only need to declare any peer to peer interest that they receive through the same platform after bad debts to HMRC.
If tax has already been deducted on the full amount of peer to peer interest received, without a deduction for bad debts, the lender can make a claim for repayment.
Any claims to set relief for peer to peer bad debts from one platform against peer to peer interest received through another platform, or to carry relief forward against peer to peer interest received in future years, must be made through a tax return.