Included in the Budget last week were a number of new announcements relating to lending through Funding Circle. Additionally, we have recently received news from HMRC regarding changes to how investors are required to pay tax on their lending. Following these announcements we wanted to clarify what this means to investors.
Personal Savings Allowance
As some of you will be aware, the Chancellor announced in the Budget the launch of the Personal Savings Allowance. From April 2016 the first £1,000 of interest for basic rate taxpayers and the first £500 of interest for higher rate taxpayers will be tax free. Importantly this applies to both interest earned from traditional savings accounts or through peer-to-peer lending.
This is fantastic news for investors and a significant step by HMRC. We estimate this change will ensure that more than 80% of investors will now be able to earn tax free returns from Funding Circle, meaning you keep even more of your earnings.
HMRC has recently confirmed that from 6th April investors will have to pay tax on the gross interest rate before deduction of fees. As a result we have made changes to the terms and conditions for investors and borrowers to clarify the way we cover the cost of loan servicing.
From April 6th we will no longer charge an annual investor fee. Instead we will take this same amount directly from the borrower repayments as a servicing fee.
There is no change to the amount paid by borrowers or the amount received by investors.
This change is reflected in clauses 8.1 and 15.1 and you can find updated investor terms and conditions here.
The loan conditions will also be changed (update to clause 5.2) to reflect the way in which fees are deducted, and you will be asked to accept them when you next bid. We hope this provides clarification.
Whilst making this change, we also made some additional amendments to the loan conditions. We have simplified the wording around the completion fee taken by Funding Circle from borrowers in clause 5.1, and deleted clause 8 which refers to our ability to restructure loans which we no longer require. This has also been removed from the terms and conditions for investors; where clauses 6.6 – 6.9 have been deleted.
Bad debt tax relief and ISA update
As we mentioned in the previous post, the Chancellor has confirmed that through self-assessment individuals will be able to make a claim for relief on losses incurred from April 2015. HMRC is still looking at the detail of this and we will provide further information once it has been clarified as to how this will work. You can read its proposed criteria for relief from bad debts here.
Additionally the Treasury has confirmed that you will be able to use your ISA to lend through Funding Circle by April 6th 2016. We’re working with the Treasury around what type of ISA your lending will be included in and you can read more about our recommendations for a Lending ISA here.
Whilst the majority of investors will benefit from tax-free lending through the Personal Savings Allowance, these new changes will benefit every individual investor and is another sign that lending through marketplaces like Funding Circle is becoming a mainstream way for individuals to earn attractive returns on their money.