Zopa-lending type question

Milarky

What's the situation regarding tax if you lend a sum for interest (as with Zopa) for repayment over a number of years (and therefore the interest has to be attributed to a particular year)?

As a taxpayer, I'd assume you'd pay a proportion (10%, 20% or 40%) of:

"Interest = number of repayments x amount of each repayment - principal"

but 'when' do you pay it exactly? Tax has to be paid in the year in which income is received so I suppose that is the general reply to this.

But it has occurred to me that if your borrower is one of a number of borrowers - as with the Zopa approach to lending - and that a particular borrower defaults - as some do - and that some at least of what you lent them is unpaid and proves unrecoverable - then you might be able to claim that interest was not received where you got back less than 100% of your money (the principal) in payments:

i.e "number x amount (of repayments)" < "principal"

[Am I right in assuming that there would be no tax to pay in such cirmcumstances?]

In general, can loans be legally constituted in this way - reducing upfront/final tax due - to say that interest can accrue without being paid and that all initial payments are purely 'return of capital'? My Barlaycard Life of Balance works like this, after all, with the interest on part of the account not being repaid - because interest is being charged on interest - and so that interest is not included in the initial payments.

[Any thoughts?]

Rafter

Presumably any Zopa interest will be taxed like any other income. You wouldn't pay tax on income you haven't earned (as a result of customers in your zopa pool not repaying their debt) so you would be able to offset these 'losses'. A bank would be able to make provision for future losses in its tax calculations, but not sure where you would stand with this as an individual doing a tax return.

R.