Chancellor introduces new bad debt relief for lending through Funding Circle

One of the main questions investors have asked us over the last four years is what more can be done to encourage the Government to introduce tax incentives for investors, specifically the introduction of peer-to-peer lending into ISAs and income tax relief on loans

As many of you will know, following our campaign the Government announced in March plans for marketplace lending to be included within an ISA wrapper; and this week’s Autumn Statement delivered another significant announcement for all individual investors.

The Chancellor confirmed plans for the introduction of a new bad debt relief for individuals lending through marketplaces like Funding Circle. This means that losses incurred by lending through Funding Circle will be offset against income tax rather than capital gains tax. This relief is expected to be effective from April 2015.

This is one of the most significant changes introduced by the Government for the industry and something we have been campaigning on for four years. It is supported by both Labour and the coalition Government and, alongside the ISA introduction, will help create a much fairer tax system for individuals engaged in marketplace lending.

Depending on your individual tax situation, by April next year we estimate individuals will be able to to earn up to 25% more as a result of these changes – and potentially significantly higher depending on your personal  investment strategy. Overall this is a win-win for Funding Circle investors and businesses and we expect it will have a hugely positive impact on the wider industry.

The Funding Circle team

David De Koning

Head of Communications


10 thoughts on “Chancellor introduces new bad debt relief for lending through Funding Circle

    • Hi PathMan, the government consultation closes tomorrow so we’re hoping to have a better sense of timings from Treasury in the new year. It is still on track to happen and we’ll update when we have more certainty on timings.

  1. This is good news. Do we know whether this will mean bad debt from previous tax years can be offset against earnings from April 2015?

  2. Yes indeed ‘Pathman’. Currently, I’m a standard PAYE earner and haven’t had so much as a single letter from the taxman in over 30 years- I want to keep it that way. That’s why I have money to invest in PSP but won’t do so until it is ISA ‘covered’.

  3. Sorry to be thick but I don’t quite understand how this works. Does this mean that if the gross interest earned in a year is say £100 and bad debt is £20 then the amount to be taxed becomes £80 with tax due (at 20%) £16 instead of £20?

    • As I understand it, that’s exactly how it will work. Under the old rules, you’d have to pay tax on the £100, and could offset the bad debt against capital gains, but since most people won’t have any capital gains most years, the bad debts were effectively losses. In the example you gave, the investor normally gets to keep £64 under the new rules, rather than £60 under the old rules. The effect is larger for investors paying 40% or 45% tax. An investor paying 40% income tax with no capital gains, would keep £48 under the new rules rather than £40 under the old rules. The old rules meant that investors paying the higher rate of income tax would typically stay away from higher-risk loans.

  4. So does this mean it’s better to back c- loans than A loans..if say over 100 loans the low grade loans generate 12percent before and percent after losses and taxes then you end up with a higher tax credit on a low grade loan . Eg lend on lower grade loans..lend 100 get 11 in interest after fees – now deduct say 5 in bad debts , leaving you with 106. This is about the same net of taxes and bad debt return as you get on lending to A loans.
    However, the c- investment now comes with a tax credit of 5 reducing your taxable income , so you are taxed on 1 rather than 6 if you I vested in A loans..
    Any comments welcome.

    • I think you might be double counting the bad debts there, but the effect of the changes will be to end the anomaly that higher risk loans were unattractive to income tax payers with no capital gains (since they currently pay income tax on all of the interest received, but can’t offset the losses against anything).

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