Buy and sell your investments
The secondary market is a way for investors to buy and sell parts of a loan that has been activated. This provides:
The price is set by the seller and is calculated as follows:
Price = investment amount, plus or minus premium or discount, plus nominal accrued interest
The seller decides how much premium or discount they wish to apply but is limited to a range of between -1% and +1%.
The premium or discount is only applied to the investment amount
An amount equivalent to the nominal accrued interest is added to the price as the interest for the entire loan period is paid to whoever holds the investment when the loan completes. (NOTE: accrued interest is calculated on the number of days expired and will change at midnight to reflect the additional day)
The process of offering an investment for sale consists of choosing an investment to sell, deciding how much to sell and whether to offer at a discount, at par, or at a premium and then posting the offer. If successful the sale will appear in your list of activity and the investment (or part of the investment) will be removed from your active investment listing.
The process of buying an investment on the secondary market consists of selecting the investment, deciding how much to buy and committing to buy. The purchase will appear in your list of activities and the investment will be added to your active investment listing.
CAUTION: When buying a loan part you are purchasing the original loan part. In line with HMRC rules you will therefore be responsible for any tax liability on all interest paid when the loan completes. As this can result in an overall loss, especially if the loan is repaid early, you should bear this in mind when purchasing on the secondary market.
The effective return is calculated as follows:
Expected Return at Term = ER; Purchase price on SM = PP; Days left DL
Effective Return = (ER-PP)/PP/DL*365
Buy £100 loan earning base rate of 12% pa, with 90 days left and 1% discount
Expected return = £106
Purchase Price = £102
Days Left = 90
Effective rate = (106-102)/102/90*365 = 15.9%
(Gross figures before any possible taxation)
If you purchase an investment on the secondary market, your available balance is reduced by the purchase price, whilst your investment account is credited with the investment value. Therefore, if you purchase at a premium, the total value of funds held will be reduced by the premium. Conversely, if you purchase at a discount, your total value of funds will increase by the discount.
Incentive bonuses offerred at the time of funding are designed to encourage larger investors to bid sooner, to complete the funding process in line with the borrower's requirements. Therefore ONLY the original bidder is entitled to the incentive bonus, it is NOT transferred with a secondary market sale.
Original purchase of £50,000 with base interest of 12% plus incentive bonus of 3%. £45,000 later sold on secondary market.
Original purchaser receives base interest of 12% plus incentive bonus of 3% on remaining £5,000
Secondary market purchaser receives base interest of 12% on £45,000
When offered, cashbacks are paid at the time the loan goes live. Therefore they play no part in subsequent purchases and sales on the secondary market.
Please note, we are unable to provide any specific information about tax. The wording below is for indicative purposes only, and does not constitute tax advice. If you are in any doubt about your tax position you should speak to your accountant or an adviser at an HMRC enquiry centre. This information is only relevant to UK tax resident individuals holding loans directly as legal and beneficial owner.
Unlike other platforms we do not collect interest from the borrower at the time the loan is issued. This means that the "accrued" interest is an estimated value and has not yet been paid by the borrower. Although HMRC require us to report payments of interest paid to individuals we are not required to report any figures for accrued interest. More information can be found here.
Seller - The funds received by the seller of a loan part on the secondary market are considered a capital transfer, plus a premium paid as an incentive, in payment for the original capital lent. They are therefore not reported to HMRC and are not usually liable for income tax.
Buyer - The buyer pays for the capital of the loan part, together with any premium. When the loan is repaid the buyer will be responsible for all income tax liability on the full interest earned. FundingSecure are required by HMRC to report this interest paid to UK individuals at the end of each tax year.
If you buy or sell a loan part on the secondary market within your IFISA any gain / loss will not affect your tax liability.
CAPITAL GAINS TAX
Secondary market transactions are considered to be purchases / sales of the original loan which is a “simple debt”. As such they are not usually liable for capital gains tax. In the event of a capital loss due to a default the loss is calculated against the original capital value, not including any premium / discount paid through the secondary market. The current capital gains annual exempt allowance for an individual is £11,100.
NOTE: If you buy and then resell the same loan part on the secondary market it may no longer be considered as a “simple debt” and any gains may be liable for capital gains tax. Further information is available here.
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(Reference number 698305)