Talking Tax

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.

Servicing fees

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.

David De Koning

Head of Communications

 

8 thoughts on “Talking Tax

  1. Hi – if there’s a default on a loan, is there still a servicing fee deducted or will FC write off its servicing fee in that instance?

    • Hi Deborah, we only deduct a monthly fee if a borrower repays its loan. if there is no repayment, then we don’t take a fee. This applies too if a business defaults.

  2. So let me get this right: If for example, my savings earn £1,000 in interest, but attract say £50 in fees. I will have to pay tax on £1,000 even though I will only have £950? The govt aren’t even guaranteeing my savings! Yet they want to tax me on money I don’t have. Another tax rip off.

    • As far as I’m aware, they’re saying the first £1000 interest will be tax free, so if you earn £1001 you will be taxed on the £1 over that band.

      Outside of that, if you’re using a service that charges fees (and this is also an investment, not savings) then of course you’ll be charged tax..

    • Previously you paid tax on £1,000. From April 2016 you will only pay tax on £50. What’s your problem?

      • That’s not the situation for many investors. If you earn interest elsewhere of £1000 or more then Mike is dead right. You will pay tax on money you didn’t get.

  3. The article says “HMRC has recently confirmed that from 6th April investors will have to pay tax on the gross interest rate before deduction of fees.”. This is obviously clear for what happens for tax year 2015-16 and onwards, but does this mean that before 6th April 2015, investors could deduct the servicing fee? I.e. for tax year 2014-15, if total interest earned was £1000 and the Funding Circle servicing fee were £100, would the taxable income be £900 or £1000?

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