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HMRC internal manual

Savings and Investment Manual

Peer to peer lending: When is a peer to peer loan treated as irrecoverable?

When does a peer to peer loan become irrecoverable?

A peer to peer loan may be accepted as having become irrecoverable when there is no reasonable prospect of the recovery of the loan. When assessing recoverability, the funds available and potentially available to the borrower must be considered. A claim therefore cannot be established simply because the borrower has insufficient liquidity on the date the loan had been called in.

Whether a loan has become irrecoverable should be judged on a case by case basis, however as the loan will be managed by a platform, the platform would usually be in a position to determine when a loan has become irrecoverable.  The platform would then inform the lender that the loan had become irrecoverable.

If the platform does not undertake this action, then the lender may still determine that the loan has become irrecoverable.  However it will be the responsibility of the lender to show that there is no reasonable prospect of the recovery of the loan and it is NOT simply a case of late payment.

When is a peer to peer loan treated as irrecoverable?

Under the legislation for income tax relief for irrecoverable peer to peer loans in certain circumstances a loan may be treated as irrecoverable for the purposes of the relief even if there may be a prospect that the lender could recover some of the amount outstanding.

This is the case for the following situations:

Loans with security

When loans are made against security, a loan may be treated as becoming irrecoverable as if the security did not exist.

When the borrower has entered legal recovery procedures such as liquidation, administration, receivership or bankruptcy the loan may be treated as becoming irrecoverable as if such action was not available.

Subsequent Recoveries

If a loan has been treated as irrecoverable in either of the scenarios outlined above then the relief will be given at the point where the loan becomes irrecoverable other than for the specified recovery actions.

If any value is then recovered, either through these actions or by any other means, then this recovery would then be taxed as additional interest received by the lender.

This is the same treatment as any other subsequent recovery of a relieved irrecoverable loans (more detail in Subsequent recoveries).