Freeonabike, the big risk with funding circle is that in the event of default you are still liable to pay tax on your gross interest, with no offset for the losses. This means that in the event of any loss you can be left with capital loss and still a tax bill to pay.

Hi Doubleh,

I think I understand this, but I just want to confirm the logic with an example:

I lend £200, and 1 loan of £20 defaults.

Do I:

1) Pay tax on the capital gains made by the remaining £180, and the £20 is lost.

That seems reasonable to me.

2) Pay tax on all the gains up to the point when the £20 loan defaults, including on the £20?

That seems less fair, but still the tax is insignificant next to the capital loss.

In my case (since I'm experimenting with only £200), both are bad, because I would lose 10% of my capital with just one loan default. But with £5000 invested, each loan would represent 0.4% of the total capital, so the tax lost on gains from defaulted loans would be an even tinier fraction of the total picture. Assuming case 2 above is true, at 40% tax rate the lost tax would be 0.4% capital x 6% gain x 40% tax rate = 0.0096% of the total investment. So each default would "cost" 0.4% capital loss + 0.0096% tax = 0.4096% of the return.

Have I misunderstood?