As the global Peer-to-Peer lending sector continues to grow, the UK in particular has seen lending in excess of £3.6 billion in the last 12 months.* The sector is widely considered to be the alternative to more traditional means of lending. Today, investors can benefit from significantly higher rates of interest from Peer-to-Peer lending than they would from investing through traditional banks.
The UK government has continued to support a more competitive financial sector and Peer-to-Peer platforms and other forms of innovative finance provider have thrived. One part of this is assessing the consistency of the tax due on interest earned by investors.
Supporting the sector
In 2014, the Chancellor announced that the government would consult on the introduction of new rules to deduct tax at source on interest paid on Peer-to-Peer loans.
Whilst this would not impact loans made until April 2017, commitment to this consultation and the announcement of the Personal Savings Allowance in March of this year, demonstrates the government’s objective to continue supporting Peer-to-Peer investors.
Tax at source
The current rules on deducting income tax at source from interest are not straightforward, especially for loans made through Peer-to-Peer platforms.
Most UK-based investors would not expect their interest income to have tax deducted at source. According to the existing rules, UK companies that lend to other UK companies would see the full interest earnings appear in their bank account. Similarly, UK-based individuals lending to other British individuals will also earn interest gross of tax.
However, individual investors who lend to UK companies, will have their interest taxed at source. The UK company or Peer-to-Peer platform would deduct an amount and set this aside for payment to HMRC.
Non UK-based individuals and companies can also expect their interest to be taxed at source by the borrower or Peer-to-Peer platform.
Clarity needed
For the Peer-to-Peer investor, who receives interest through a platform, there is a clear discrepancy. Whereas some of their interest income received will not be subject to deduction of income tax, some will be, depending on the type of borrower.
The existing legislation creates confusion amongst the investor, the Peer-to-Peer platform and the borrower. It has yet to be made clear to all parties what their duties are and, most importantly, how much they should be setting aside for HMRC.
Wellesley’s contribution
Peer-to-Peer platforms and lenders, borrowers of Peer-to-Peer loans and other representative bodies and tax professionals have contributed their views since July of this year. Whilst the consultation period is coming to a close, the evolution of the Peer-to-Peer sector will certainly continue. Wellesley supports the government’s efforts to create consistency in the sector and believes that some essential simplification for investors is much needed. This is ultimately the source of funds that flows into the lending industry in the first place.
Wellesley strongly advises investors to consult professional financial advice to make sure they understand the tax implications of Peer-to-Peer loans. Our goal is to provide innovative investment options to our customers that provide the best possible returns with the peace of mind that every loan is asset-backed, primarily by bricks and mortar. For further information about our investment options, please telephone 0800 888 6001 or email [email protected].