Tax Relief When a Peer-to-Peer Loan Defaults

If you lend money through a peer-to-peer platform and a borrower defaults, you may be able to reduce the tax you owe on the interest you earn from other peer-to-peer loans. Relief for bad debts on peer-to-peer loans from 6 April 2015 can be claimed in tax returns, and from 6 April 2016 bad debts may be set against interest received on other peer-to-peer loans made through the same platform without needing to make a claim, if the relief conditions are met¹.

The relief is narrow. It can only be set against interest that you receive on other peer-to-peer loans. It cannot be used against any other form of income, such as your salary, pension or bank savings interest¹. To qualify, you must be liable to UK Income Tax on your peer-to-peer income, make loans through peer-to-peer lending platforms that are authorised by the FCA, and be the legal lender at the time when it is agreed that the loan has gone bad¹.

This page explains what the relief is, which loans qualify, how it interacts with your peer-to-peer interest, how to claim it through Self Assessment, and where it does not apply. It also covers what happens with an Innovative Finance ISA, where the tax position is different.

What P2P bad debt relief is

Peer-to-peer lending matches investors with borrowers, who could be individuals, businesses, or property developers³. When a borrower fails to repay, the lender loses money. The tax system recognises this with a specific relief that reduces the tax due on peer-to-peer interest.

The relief works by allowing bad debts to be set against interest received on other peer-to-peer loans. From 6 April 2016, this may happen automatically through the platform without the lender needing to make a claim, provided the relief conditions are met¹. Before that date, from 6 April 2015, relief could be claimed in tax returns¹.

This is not a general tax relief for investment losses. It is specific to peer-to-peer lending and operates within the peer-to-peer interest calculation. The relief does not turn a loss into a refund of tax paid on other income. It reduces the peer-to-peer interest that is taxable.

The platform plays a role in reporting. Kuflink, a peer-to-peer lending platform, provides a tax certificate tool for interest and claiming tax relief on unpaid loans¹. This suggests platforms may issue statements that help lenders work out their position, though the legal responsibility for the tax return remains with the lender.

Which peer-to-peer loans qualify

Not every peer-to-peer loan qualifies for bad debt relief. Three conditions must be met¹:

• You must be liable to UK Income Tax on your peer-to-peer income.
• You must make loans through peer-to-peer lending platforms that are authorised by the FCA.
• You must be the legal lender at the time when it is agreed that the loan has gone bad.

The FCA authorisation requirement means loans made through platforms that are not authorised do not qualify. If a platform has failed or closed, the position may be more complicated. The FCA's risk summary for peer-to-peer agreements states that if the platform fails, it may be impossible for you to collect money on your loan².

The legal lender condition matters if loans are held in a structure or transferred. If you are not the legal lender when the loan is agreed to have gone bad, the relief is not available to you.

The relief applies to bad debts on peer-to-peer loans from 6 April 2015, claimable in tax returns, and from 6 April 2016 bad debts may be set against interest received on other peer-to-peer loans made through the same platform without needing to make a claim, if relief conditions are met¹.

Setting losses against P2P interest

The relief operates by offsetting bad debts against peer-to-peer interest. It cannot be used against any other form of income¹. This means the relief would reduce the taxable peer-to-peer interest, not your salary or bank savings interest.

The offset is against interest received on other peer-to-peer loans made through the same platform. This is a same-platform rule. If you lend through multiple platforms, the relief does not appear to allow a loss on one platform to be set against interest on another.

From 6 April 2016, the offset may be automatic if the relief conditions are met¹. This means the platform may apply the bad debt against interest without the lender needing to make a claim. If the platform does not do this, or if the conditions are not met, the lender would claim relief in their tax return.

The Financial Ombudsman Service has set out a position on set-off in the context of PPI compensation, stating that it can be fair for a business to set off compensation against arrears on the account, but not fair to require the balance to be reduced below what would be outstanding if PPI had not been added⁴. This is a different context, but it illustrates that set-off rules have limits and fairness considerations.

Claiming the relief through Self Assessment

If the relief is not applied automatically by the platform, you would claim it through Self Assessment. The relief can be claimed in tax returns from 6 April 2015¹.

Self Assessment is the system for reporting income and gains to HMRC. Your Self Assessment statement is also known as your bill⁵. If you need to claim the relief, you would include it in your tax return.

Keeping records is important. HMRC guidance on keeping tax records states that where records have been lost, the action is to try to get copies, for example ask banks for copies of statements or suppliers for duplicate invoices⁶. For peer-to-peer lending, this would mean keeping records of the loans, the interest received, and any bad debts.

If you owe money to HMRC for tax or penalties, there is an online tool to help you find the right guidance and support⁷. This is separate from the bad debt relief, but relevant if the relief affects your tax bill.

The HS340 helpsheet covers interest and alternative finance payments eligible for relief on qualifying loans and alternative finance arrangements⁸. This is the official guidance for the relief.

Where the relief does not apply

The relief does not apply to all peer-to-peer losses. It is limited to bad debts on peer-to-peer loans that meet the conditions. It cannot be set against salary or other income¹.

If you hold peer-to-peer loans in an Innovative Finance ISA, the position is different. An IFISA does not reduce the risk of the investment or protect you from losses, so you can still lose all your money. It only means that any potential gains from your investment will be tax free². Because ISA returns are already tax-free, the bad debt relief rules that apply to taxable peer-to-peer interest do not apply in the same way.

The IFISA was available from 6 April 2016, when interest and gains from peer-to-peer loans qualified for tax advantages where these loans are made through an IFISA⁹. You will not be able to simply transfer your existing peer-to-peer investments into an innovative finance Isa, if the site you invest with launches one³.

If you are a non-UK resident with UK income, you do not need to report your income to HMRC if you have already claimed tax relief under a double-taxation agreement¹⁰. This may affect how you claim the peer-to-peer relief.

Does bad debt relief apply to P2P loans held in an Innovative Finance ISA?

No. An Innovative Finance ISA does not reduce the risk of the investment or protect you from losses, so you can still lose all your money. It only means that any potential gains from your investment will be tax free².

Because ISA returns are already tax-free, there is no tax on the peer-to-peer interest to offset. The bad debt relief rules that apply to taxable peer-to-peer interest do not apply in the same way to IFISA holdings.

The IFISA was available from 6 April 2016, when interest and gains from peer-to-peer loans qualified for tax advantages where these loans are made through an IFISA⁹. The IFISA is most commonly used for peer-to-peer lending, which matches up investors with borrowers, who could be individuals, businesses, or property developers³.

If you hold peer-to-peer loans outside an IFISA, the bad debt relief may apply. If you hold them inside an IFISA, the tax-free wrapper means there is no tax to relieve.

What happens if you recover money after claiming the relief

If you recover money on a loan you had treated as a bad debt, that recovery would affect the relief you claimed. The guidance does not set out a specific recovery mechanism for peer-to-peer bad debt relief, but in general any recovery would need to be reflected in your tax position.

The relief works by reducing taxable peer-to-peer interest. If a bad debt is later recovered, the interest that was offset would need to be brought back into charge. This is a general principle of tax reliefs for bad debts.

Keeping records of all recoveries is important. HMRC guidance on keeping records states that where records have been lost, the action is to try to get copies⁶. For peer-to-peer lending, this would mean keeping records of any recovery payments.

If you are unsure how a recovery affects your tax position, you can check with HMRC or a tax adviser. The online tool to help you find the right guidance and support if you owe money to HMRC for tax or penalties is available⁷.

Can P2P losses be set against salary or other income?

No. Relief for bad debts on peer-to-peer loans can only be set against interest that the lender receives on other peer-to-peer loans. It cannot be used against any other form of income¹.

This is a key limit. If you have a salary, pension, or bank savings interest, the peer-to-peer bad debt cannot reduce the tax on those. The relief is confined to the peer-to-peer interest calculation.

This means the relief is only valuable if you have peer-to-peer interest to offset. If you have no peer-to-peer interest in the tax year, the relief may not be available. The guidance does not set out a carry-forward rule for peer-to-peer bad debt relief in the same way as some other reliefs.

If you are struggling with debt more generally, free and impartial debt advice is available¹¹. StepChange Debt Charity offers free debt help online 24/7¹². There are free advice services that can help¹³.