HMRC regard an individual who is making loans and charging interest as engaging in an investment activity rather than a trade of lending money, unless there is sufficient evidence of trading to displace that presumption (BIM62201). If we accept that Mike is an investor, the interest he earns will be taxed as savings income and any losses he suffers cannot be deducted as trading expenses or relieved as a trading loss.
There are two distinct mechanisms for getting relief for the losses. There might be a capital loss available under Section 253 TCGA 1992 for the loans that Mike has managed himself. Chapter 1A of Part 8 of the Income Tax Act 2007 (‘ITA 2007’) may provide income tax relief for a loan managed by a peer-to-peer operator.
Where income tax relief has been given for an irrecoverable amount, the loss cannot be relieved against capital gains (S.1F(5) TCGA 1992). Some of the income tax relief applies without a claim (see below) and so any loss that may be relieved that way must be given income tax relief rather than as a capital loss. Where there is insufficient income to relieve the loss then it might be possible to look at relief for a P2P loan through Capital Gains Tax instead.
Claiming a capital loss for an irrecoverable loan under s.253 TCGA
The scope for relieving irrecoverable loans under S.253 TCGA is wide. It applies to a loan made by Mike to anyone except his spouse or civil partner as long as the borrower used it for a trade that doesn’t include lending money. If the loan was made before 24 January 2019, there is also a requirement that the borrower is resident in the UK. The main practical obstacle is establishing that the loan is irrecoverable. That won’t normally be a problem if the borrower was a company that has gone bust without being able to repay its loan. However, a claim would be denied if Mike had lent money to a lost cause because the loan was irrecoverable from the start or he’d lost his money because of his own actions or failure to act (S.253(12) TCGA 1992). He should also expect HMRC to be sceptical about any claim if the borrower’s trade is managing to limp along (CG65950) or he’s claiming that only part of the loan has become irrecoverable, but that possibility has to be acknowledged because of the Atherley decision of 2018 (TC 06610).
Once Mike has established that he does have a qualifying loan that has become irrecoverable, he can make a claim from that point on, even after many years. The loss is treated as incurred when the claim is made (S.253(3)) unless the claim specifies an earlier time when it was already irrecoverable (S.253(3A)) providing that time was no earlier than the start of the earlier of the two tax years ending in the two-year period ended on the date of the claim. That might be an important consideration because losses must be used to fully relieve chargeable gains incurred in the same tax year but if the losses are carried forward, they are used only against gains in excess of the individual’s CGT annual exemption. It’s also worth noting that the loss cannot be carried back to relieve gains in an earlier tax year than the one in which the loss is incurred.
Income tax relief for an irrecoverable P2P loan (Chapter 1A of Part 8 ITA 2007)
For the loans that Mike has made through a P2P platform, it should be easier to establish when they have gone bad. HMRC accept that the platform should be in a good position to let Mike knows when his loans have become irrecoverable (SAIM12050).
Under no circumstances can this legislation relieve anything other than income from a P2P loan. Several times, the relief is called “sideways” but that just means that income from a loan on one platform is being relieved by an irrecoverable loan made through a different platform.
This relief takes three forms.
- Offsetting an amount of loan that has become irrecoverable against interest received during the tax year on other loans made by the same platform. This requires no claim; it is automatic (S.412A ITA 2007)
- Offsetting an irrecoverable amount of a loan made through one P2P platform against income received in the year from a loan made through another platform. This relief has to be claimed and only irrecoverable amounts that were not relievable by S.412A are eligible to include in the claim (S.412B ITA 2007)
- If there is an irrecoverable amount that incapable or being relieved under 412A or 412B (i.e. because there is insufficient income from all P2P sources in the year) a claim may be made to carry it forward (S.412C ITA 2007). Once a claim has been made to carry it forward, relief is automatic and relieves earlier rather than later years (S.412D ITA 2007). However, if it has not been relieved against income in the first 4 years, it cannot be carried forward any further.
Income from P2P loans and irrecoverable amounts are reported using Box 3 on page 1 of SA101 (‘Additional information’). Relief is given effect in the income tax calculation by reducing the figure in Box 3. As relief under 412A is automatic, it is enough simply to reduce the Box 3 figure. Since the irrecoverable amount can only be set against income from another P2P platform in year or carried forward to later years on the making of a claim, it is advisable to do so in Box 19 (‘Any other information’) on the main return by quantifying the irrecoverable amounts treated that way and citing to the appropriate legislation.
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