SECONDARY markets where peer-to-peer loans can be sold at a premium or discount are at risk of falling into the taxman’s definition of a trading activity, rather than an investment.
On the whole, the practice is compliant with current regulations and can be a good way of boosting liquidity in a less-than-liquid market. Allowing investors to set their own prices can make a secondary market even more liquid than one where loans must be sold at par.
However, from HMRC’s perspective, the tax paid on a profitable trade would be different to the tax paid on the earnings from an investment. There could be a wide difference between a capital gains tax bill or an income tax bill.
The industry varies widely as to whether it enables loans to be sold at varying prices or just at par. Platforms such as FundingSecure and Ablrate allow loan parts to be sold at both a premium or a discount, and Assetz Capital allows discounts but not premiums, while Landbay, Proplend and Lendy loans can only be sold at the same price.
A number of platforms allowing premium and discount prices have expressed concerns that HMRC guidelines on investing versus trading are unclear, making it harder to assess which camp a sale falls into.
The taxman’s definition depends on a wide variety of factors, which centre around the intention of the individual. Its guidelines say that you are most probably trading if you want to make a profit, you have bought goods to sell them on or you sell things you have just bought.
But you are probably not regarded as trading if you only sell things to cover your costs or you only make sales occasionally.
Peer2Peer Finance News understands that from HMRC’s perspective, most individuals selling P2P loans on the secondary market are not trading but investing and that there would have to be sufficient evidence of trading to displace that investment presumption.
“We spent a lot of time creating a secondary market and we calculate everything including accrued interest so that everyone is paid fairly,” said David Bradley-Ward, chief executive of Ablrate.
“Rather than just having a load of loans for sale at par, people can create their own bids more like a stock market.
“There are instances where the credit profile of a loan might change. If you’re only selling at par, how would you compensate the person who took the risk in the first place?”
Stuart Law, chief executive of Assetz Capital, agrees with the idea of discounts in case the credit profile of a loan changes, but said he is “uncomfortable with premiums”.
“Does the new buyer know that they’re buying at a premium? There is the credit risk that investors don’t realise they’re taking, or the risk that we’re not trading customers fairly,” he said.
Law claims that one P2P lender previously had a problem with automated bidders buying up loan parts as soon as they came on to the platform, only to list them on the secondary market at a premium.
“I know a City trader who used to make 15 per cent returns per year by trading their loans,” he said.
Ultimately, P2P lending is not necessarily the right choice for investors who want fast, flexible access to their money.
“At Proplend, loans are just sold at face value on the secondary market as I want people to feel committed to the loan maturity,” said Brian Bartaby, chief executive of the property lender.