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What is the Tax Position?

What is the Tax Position?

The following is based on an opinion from our accountants as to the treatment of tax for certain transaction on our platform.

OUR COMPANY IS NOT AUTHORISED TO GIVE TAX ADVICE, THEREFORE THE BELOW IS ONLY INTENDED TO BE A GUIDE AS TO OUR UNDERSTANDING OF THE TAX TREATMENT OF ABLRATE TRANSACTIONS AND WAS PROVIDED BY OUR ACCOUNTANTS. YOU SHOULD CONTACT YOUR TAX ADVISORS FOR AN ASSESSMENT OF YOUR OWN PERSONAL SITUATION IN RELATION TO YOUR TRADING ON ABLRATE. ABLRATE ISSUE THIS FAQ AS A GUIDE ONLY AS OUR CURRENT UNDERSTANDING OF THE TAX TREATMENT OF TRADES ON OUR PLATFORM. YOU AGREE THAT AVIATION AND TECH CAPITAL LTD (‘ABLRATE’), ITS OFFICERS AND EMPLOYEES ARE NOT RESPONSIBLE FOR, AND ARE SPECIFICALLY INDEMNIFIED FROM, ANY ACTION TAKEN, OR NOT TAKEN THAT RESULTS IN ANY ACTION FROM HMRC OR OTHER TAX AUTHORITIES IN RELATION TO YOUR TAX REPORTING. YOU ARE SOLELY RESPONSIBLE FOR REPORTING YOUR TAX AFFAIRS TO THE TAX AUTHORITIES.

Loans on Ablrate are Loans made by Individual Lending Members to companies and as such may fall under the definition of “Securities” and are covered by the Accrued Income Scheme (AIS).  The AIS was brought in in 1986 to counteract “bond washing” which was a growing issue whereby income could be reclassified as capital.

Where securities are transferred with accrued interest the transferor is taxable on an amount (the ‘accrued amount’) equal to the interest accruing on those securities during his period of ownership and the transferee is entitled to relief of the same amount. Where securities are transferred without accrued interest, the transferee is taxable on the ‘rebate amount’ and the transferor is entitled to relief of the same amount.

In other words, a charge will arise in respect of the adjustment for the accrued interest not received in the following circumstances.

Securities were purchased without accrued interest (ex-dividend). The amount of the charge will be the amount by which the purchase price was reduced on account of the interest not received.

Securities were sold with the accrued interest (cum-dividend). The amount of the charge will be the amount by which the sale price was increased on account of the interest not received.

On the other hand, a relief will be due in respect of the adjustment for the amount of extra interest received in the following circumstances.

Securities were purchased with accrued interest (cum-dividend). The amount of the relief will be the amount by which the purchase price was increased.

Securities were sold without accrued interest (ex-dividend). The amount of the relief will be the amount by which the sale price was decreased.

Where, under the rules, a person is treated as entitled to a sum, he is treated as receiving that sum on the last day of the interest period in question. Since tax year 2005–06, the charge to income tax is a ‘free-standing’ charge under ICTA 1988, s. 714(2)–(2B) (ITA 2007, S. 617). The income is chargeable to tax, on the full amount of that is treated as received, in the year in which it is treated as being received (which will be the day on which the interest period ends).  Therefore, where the interest period straddles the tax year-end the income or deduction would be included in the later year’s tax return as that will be the year in which the interest period ends.

In essence the AIS taxes individuals, who are either buyers or sellers of securities, on interest accrued for the period in which he or she owned the loan note.

Our understanding of this:

Primary Market Trades

Income from interest on loans held will have a tax liability for the amount of interest received in the taxable period.

Secondary Market Trades

Loans sold at par (i.e. 100%):

Seller: Where a seller of loans receives interest, paid by the incoming buyer for a sale, for the period within the month, that interest would attract tax as per the normal interest on a primary trade.

Buyer: Where a buyer pays interest to the seller for the period the loan has been held the buyer is entitled to relief on the amount paid, offset against the interest received on the following payment date. Where the payment straddles a tax year, the payment can be offset against previous interest earned.

Loans Sold for a Premium

Seller: Where a loan is bought for a premium (i.e. more than 100%) the premium amount for the seller would be taxed as a capital gain)

Buyer: Where a buyer has paid a premium for a loan the buyer has essentially paid more for the capital in the loan and is entitled to offset capital gains against that premium when the buyer is repaid capital (either through a sale or the loan maturing). As an example, if a loan of £10,000 is purchased for 101% (£10,100), when the capital is repaid (£10,000) the buyer has made a ‘loss’ on the capital of £100 and can offset that against capital gains. The reality is that the buyer would have received interest to compensate for this premium and would make an overall profit, but as interest not capital, and therefore would be taxed on that gain as interest.

Loans sold at a discount

Seller: Where a seller has sold a loan for discount the seller has essentially made a ‘loss’ on the capital amount which could be offset against other gains.

Buyer: Where a buyer has paid a discount for a loan the buyer has essentially paid less for the capital in the loan and crystallizes that gain when the buyer is repaid capital (either through a sale or the loan maturing). As an example, if a loan of £10,000 is purchased for 99% (£9,900), when the capital is repaid (£10,000) the buyer has made a ‘gain’ on the capital of £100 and has a capital gain.

The rules do not affect companies as lenders as this is taxed under the loan relationships rules between companies for corporation tax purposes.

Instant Returns

Instant returns are based on an amount and time period (for more information see here). The opinion we have received is that Instant Returns, because they are not based on a loan closing (we pay them regardless of the loan closing or not), then they are not seen as ‘Interest’.

To account for these as tax, the opinion is that Instant Return should be treated as ‘fee’ and counted as a discount to the capital you have purchased. This means that upon the sale of that loan you would be crystallizing a capital gain and it should be reported as such.

As an example;

On the first day of a loan listing you buy £10,000 of the loan paying 12% p.a on the primary market which has Instant Returns enabled. On closing of that loan (lets assume it is listed for 1 month and closes at the 1 month mark. You would receive £100 in Instant Returns.

This means you have bought the loan for £9,900. When you sell the loan (if you sell at 100% on the secondary market, or run it to the end of the term) you will have a gain of £100 on your capital. This would, in the opinion of our accountants, be a capital gain.

Further reading from HMRC

OUR COMPANY IS NOT AUTHORISED TO GIVE TAX ADVICE, THEREFORE THE ABOVE IS ONLY INTENDED TO BE A GUIDE AS TO OUR UNDERSTANDING OF THE TAX TREATMENT OF ABLRATE TRANSACTIONS. YOU SHOULD CONTACT YOUR TAX ADVISORS FOR AN ASSESSMENT OF YOUR OWN PERSONAL SITUATION IN RELATION TO YOUR TRADING ON ABLRATE. ABLRATE ISSUE THIS FAQ AS A GUIDE ONLY AS OUR CURRENT UNDERSTANDING OF THE TAX TREATMENT OF TRADES ON OUR PLATFORM. YOU AGREE THAT AVIATION AND TECH CAPITAL LTD (‘ABLRATE’), ITS OFFICERS AND EMPLOYEES ARE NOT RESPONSIBLE FOR, AND ARE SPECIFICALLY INDEMNIFIED FROM, ANY ACTION TAKEN, OR NOT TAKEN THAT RESULTS IN ANY ACTION FROM HMRC OR OTHER TAX AUTHORITIES IN RELATION TO YOUR TAX REPORTING. YOU ARE SOLELY RESPONSIBLE FOR REPORTING YOUR TAX AFFAIRS TO THE TAX AUTHORITIES.

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