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HMRC internal manual

Savings and Investment Manual

Peer to peer lending: Subsequent recoveries of peer to peer loans

The person who made the loan, or the person to whom the rights to recover the principal of the loan have been assigned, are both referred to here as simply as the Lender.

If relief has been claimed because the principal of a loan has been treated as becoming irrecoverable, but the lender subsequently recovers any or all of the principal of the loan, then the lender should treat any amount received as peer to peer (P2P) interest received at the time of the recovery.

A lender will be treated as recovering the amount if they (or any other person at their direction) receives any form of payment or value either

  • in satisfaction of the lender’s right to recover the principle, or
  • in consideration of the lender’s assignment of that right.

Amount of recovery taxed as interest received

The amount of the principal recovery that is deemed to be a payment of interest under the subsequent recovery provisions, and is brought into tax as interest received by the lender is the lower of:

  1. the amount of the outstanding principle recovered, and
  2. the amount of relief that has been given for the irrecoverable loan.

 

Example 1

Bridget makes 15 identical £10 loans. 2 of these loans become irrecoverable in tax year 17 and she receives relief of £20 to set against the other P2P interest that she receives in the tax year 17.

In tax year 18, one of the irrecoverable loans is partly recovered to an amount of £5. In the tax year 18 this £5 recovery is taxable as P2P interest received by Bridget.

Example 2

Craig lends £20 through a P2P platform. He then assigns the right to recover the remaining principal to Lucy for £15. £5 of the loan is repaid to Lucy. The remaining principal of the loan is written off.

The amount of Lucy’s tax relief is the lower of

  1. amount paid for the loan to be reassigned less subsequent repayments (£15 - £5 = £10) and
  2. the principal of the loan outstanding on assignment less subsequent repayments (£20 - £5 = £15)

So the amount of relief that Lucy receives is £10.

A year later, the whole of the principal of the loan that was written off is recovered. Lucy therefore gets a recovery for the full amount (£15), but only the amount of relief she has claimed (£10) is treated as P2P interest received under the Subsequent recovery provision.

The additional £5 that Lucy receives above what she paid for the loan is taxed in the same way as it would have been had the loan been repaid in full and on time.