Tax on Peer to Peer Lending

Peer-to-peer (P2P) lending has become a popular way to earn interest by lending money directly to individuals or businesses through online platforms. If you invest through P2P lending, you need to understand how the interest you earn is taxed and what relief is available if borrowers fail to repay. This article explains how P2P lending income is treated for tax purposes and how to report it correctly.

What is peer-to-peer lending?

Peer-to-peer lending allows you to lend money directly to borrowers without going through a traditional bank. You place your money with an online platform (also called a lending intermediary) that is regulated and authorised by the Financial Conduct Authority (FCA). The platform spreads your money across many different borrowers as small loans, and similarly, each borrower receives small amounts from many different lenders to make up their total loan.

The platform collects interest and capital repayments from borrowers and passes them on to you as the lender. The main attraction of P2P lending is the potential to earn higher interest rates than you might get from a bank savings account.

How P2P interest is taxed

Interest you receive from peer-to-peer loans is taxable as savings income, just like interest from a bank account.

Some platforms pay interest with tax already deducted, whilst others pay it gross (without tax taken off). If you receive interest gross, you are responsible for notifying HMRC of this income and paying the correct amount of tax.

You may be entitled to the Personal Savings Allowance, which allows basic rate taxpayers to receive up to a certain amount of savings interest tax-free each year. Higher rate taxpayers receive a lower allowance, and additional rate taxpayers receive no allowance. The same rules that apply to bank interest apply to P2P interest.

Tax relief for irrecoverable loans

One of the risks of P2P lending is that borrowers may default on their loans. If this happens, you can claim tax relief for the loss.

Who can claim relief

You can claim tax relief if you:

• Are liable to UK Income Tax on your P2P income
• Make loans through P2P platforms authorised by the FCA
• Are the legal lender when it's agreed that the loan has gone bad

When you can claim

Tax relief applies when there is no reasonable prospect of the P2P loan being repaid. It does not apply to late payments where repayment is still expected.

The amount of relief you can claim is the outstanding loan amount from the borrower, less any repayments already received.

Relief for bad debts on P2P loans can only be set against interest you receive from other P2P loans. You cannot use it against other types of income such as employment income, rental income, or dividend income.

Bad debt relief has been available for P2P loans that became irrecoverable from 6 April 2015 onwards.

Automatic relief through platforms

From 6 April 2016, if you meet the relief conditions, you may be able to set bad debts against interest received from other P2P loans made through the same platform without needing to make a formal claim. The platform may handle this automatically.

However, if you want to set relief for bad debts from one platform against P2P interest received through a different platform, or carry relief forward to future years, you must make a claim through a Self Assessment tax return.

If the debt is later recovered

If you've received relief for a bad debt and the borrower later repays the loan (for example, through late payment or asset recovery), the recovered amount is treated as new P2P income in the year you receive it. This means you'll need to pay tax on it.

Reporting P2P income on your tax return

If you complete a Self Assessment tax return, you must report your P2P interest on form SA101 (Additional Information) under the section for "Other UK income, Interest from gilt-edged and other UK securities, deeply discounted securities and accrued income profits."

When completing the form:

• Box 3: Enter interest received gross, less any bad debt relief from all platforms
• Box 1: Enter interest received net (after tax deducted), less any bad debt relief from all platforms
• Box 2: Enter the full amount of tax deducted from the interest

If you have excess relief for P2P bad debts that you're carrying forward to future years, you don't need to include this figure on your tax return. However, you should keep detailed records so you can make a correct claim when you use the relief in a future tax year.

If you don't complete a tax return

From 6 April 2016, if you don't need to submit a tax return, you only need to declare P2P interest to HMRC after deducting bad debts from the same platform.

If tax has already been deducted on the full amount of P2P interest without accounting for bad debts, you can make a claim to HMRC for repayment of the overpaid tax.

Remember, any claims to set relief for bad debts from one platform against interest from another platform, or to carry relief forward, must be made through a Self Assessment tax return—even if you wouldn't normally need to complete one.

Keeping records

You should keep records of all your P2P lending activity, including:

• Interest received from each platform
• Details of any loans that become irrecoverable
• The amounts of bad debt relief claimed
• Any relief carried forward to future years

These records will help you complete your tax return accurately and support any claims for relief you make.

Sources

• Peer to peer lending
• Income Tax relief for irrecoverable peer to peer loans: final guidance

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.