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HMRC internal manual

Savings and Investment Manual

Peer to peer lending:What is an eligible "peer to peer loan"?

The definition of a peer to peer loan for this tax relief is set out at section 412I Income Tax Act 2007.

This definition is based on the definition used to define peer to peer lending as an activity that is regulated by the Financial Conduct Authority (FCA) (link to FCA website).

However, for a peer to peer loan to be eligible for this relief it must also meet the following three conditions:

  1. The lender must be subject to UK Income Tax on their income (if any) from the loan
This condition will still be met if the lender has no tax to actually pay, for instance because the amount of interest paid would not have exceeded the lender’s personal savings allowance.  
This condition will not be met if the lender is not subject to tax on the income, for instance because the loan is held within an ISA.  
    2. The loan is made on commercial terms  
  
The loan must be made at markets rates and conditions and on an arms length basis.  
    3. The loan is not part of a scheme or arrangement to obtain a tax advantage

If the loan is

  • made on commercial terms,
  • is not part of a scheme to obtain a tax advantage, and
  • the lender is subject to UK Income Tax on their income from the loan

then the loan will be an eligible “peer to peer loan” provided it also meets the following conditions:

 

EITHER

  1. The lender is
  • an individual, OR
  • a partnership consisting of 2 or 3 persons, of which at least one must not be a company, OR
  • an unincorporated body of persons which is not a partnership but contains at least one person who is not a company.

OR

  1. The borrower is of the same description as in a)
  • the loan is not used for the purpose of a business carried on by the borrower, OR
  • the loan principal is less than £25,000.

These conditions are the same as those that define an “article 36H agreement” in FSMA 2000 (Regulated Activities) (Amendment) (No.2) Order 2013.  A platform that arranges article 36H agreements will be carrying on the regulated activity of “operating an electronic system in relation to lending” and will need to be authorised by the FCA.

 

UK individuals

If the lender is an individual then the loan should always fall within the definition of an article 36H agreement.

This means that for an individual who is subject to UK Income Tax on their income from the loan, who makes loans on normal market rate terms, through a regulated UK platform and does not use the loan as part of a scheme to obtain a tax advantage, then if the loan becomes irrecoverable it should qualify for this relief.