Offset Your P2P Lending Losses from April 2015

Probably from April next year, any losses you make in P2P lending can be offset against your income tax. The news was announced in the Chancellor's Autumn Statement today.

Currently, losses in P2P lending either can't be offset in the case of lending to individuals, or they can only be offset against capital gains in the case of business loans.

If you make 10% interest before bad debts, but lose half to bad debts, you might currently still have to pay income tax on the full 10%.

The change will mean that you would pay income tax on just 5% after deducting losses.

If your loans are protected by a bad-debt provision fund, you do not, even now, suffer taxation on your losses most of the time. This will only happen when a bad-debt provision fund is overwhelmed.

Offset losses at one platform against winnings elsewhere

The best bit is that if you have dabbled in lending to high-risk borrowers in one place and come out badly, you will be able to offset your winnings eleswhere against that loss to reduce your tax bill.

Making your tax situation easier

In addition, the Chancellor announced that the Government will consult on whether to have P2P lending companies automatically withhold income tax at the basic rate, just like banks do when they pay you interest on your savings or current accounts.

This change will mean that lower-rate taxpayers will not need to file a tax return just to declare their P2P lending interest.

Will interest rates change?

If losses become offsetable, it could potentially have an impact on the interest rates you can get in P2P lending. Potentially, it will have a slight negative impact as more lenders are attracted; more lenders means more competition to lend and that pushes rates down.

There's a small chance some lenders might see rates rise. Websites with provision funds might see some lenders leave to dip their toes elsewhere, now they know the taxman won't be taking more than his fair share. The remaining lenders will have slightly less competition and could get better rates.

Tax to be due on gains from loan sales

It might not all be good. It seems probable that the Government will also start taxing lenders when they sell loan parts for more than they're worth. Funding Circle's longstanding view has been that these are currently not taxable.

That change would mean lenders could also offset losses for selling loans for less than they are worth.

Nick Harding, CEO of Lending Works, said:

“It feels once again like the Government favours the peer-to-peer industry. We are delighted by the proposed tax treatment applicable to peer-to-peer lenders’ losses and the consultation on a regime to withhold income tax across all peer-to-peer platforms.

“In this persistently low interest-rate environment, peer-to-peer lending continues to provide the most competitive savings rates for your average money saver, and this is something to be celebrated.

“Until the banks and building societies are able to bring compelling alternatives to the table, we encourage the government to continue to incentivise our customers in every way possible to make peer-to-peer a part of a diversified savings portfolio.”

Sources: UK Government

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