Britain lets you write off the loans that failed. America is less generous

Figures relate to tax year 2025-26 (UK) · 2025 (US)

Peer to peer platforms made lending feel simple. You put money in, it spreads across hundreds of small loans, and a statement arrives each year showing interest earned and a handful of borrowers who did not pay.

Britain lets you set those failed loans against the interest, which gives a sensible net figure. America keeps the two apart. The lending income lands in full, and the losses go somewhere much less useful.

Key takeaways

• Lending income from a platform is taxable in both countries.
• Britain allows relief for irrecoverable loans against that interest.
• America treats a bad loan as a capital loss instead.
• Capital losses offset gains first, with a small annual amount against income.
• An Innovative Finance ISA is tax free here and fully taxable there.
• The platform account itself can need separate annual reporting.
• Reinvested interest is taxed in the year it is credited.

What is peer to peer lending income?

It is the interest paid to you by borrowers through a platform that matches lenders with people or businesses wanting to borrow. According to HMRC guidance, it is taxed as savings interest rather than as a trading profit.

Platforms pay it gross, with nothing deducted at source.

Your personal savings allowance can cover a slice of it here.

How does Britain treat a failed loan?

It allows relief where a loan becomes irrecoverable, setting the capital lost against peer to peer interest from the same or later years. That keeps the tax close to your actual economic return.

The relief is specific to this kind of lending.

Most platforms report the figure you need directly on the statement.

How does America handle the same loss?

As a non-business bad debt, which is treated as a short term capital loss rather than a deduction against interest. Capital losses offset capital gains first, with only a small amount usable against ordinary income each year.

So the interest is taxable in full while the loss queues up behind other gains.

That mismatch is the main difficulty for an American lender here.

A worked example

The figures below are illustrative and use round numbers to show the mechanics.

Paul is American and lives in Bristol. His platform statement shows £4,000 of interest earned and £1,200 of loans written off during the year.

Britain taxes him on £2,800, because the relief nets the two together. His personal savings allowance then covers part of what remains.

America taxes the full £4,000 as interest, roughly $5,000. The £1,200 becomes a capital loss, useful only against capital gains or in small annual slices against income.

Neither country lets you ignore the difference, so both sets of figures have to be worked out.

The British return is the quicker of the two to prepare.

The two treatments compared

What about an Innovative Finance ISA?

It shelters the interest from British tax entirely, which is genuinely valuable here. America ignores the wrapper completely and taxes the interest as if the account were an ordinary one.

No British tax paid means no credit available either.

Our guide to the ISA and PFIC problem explains how America views British wrappers.

Is the platform account reportable?

Often yes. A platform holding your money and your loan book looks like a foreign financial account, and the balance counts towards the annual reporting threshold alongside your bank accounts.

The test looks at the peak balance during the year.

Our guide to FBAR deadlines and penalties covers the mechanics.

How do you get the figures?

From the annual statement, which almost every platform provides. It shows interest earned, loans written off and any recoveries, usually for the British tax year rather than the calendar year.

That mismatch means rebuilding the figures from monthly data.

Download the transaction history rather than relying on the summary.

How to report it

1. Download the full transaction history for the calendar year.
2. Total the interest credited to your account in that period.
3. Total the loans written off and any amounts later recovered.
4. Convert both figures to dollars on a consistent basis.
5. Report the gross interest as income on your American return.
6. Treat the written off capital as a short term capital loss.
7. Check the platform balance against the account reporting threshold.

What if a loan is later recovered?

A recovery reverses part of the earlier loss, and both countries expect you to pick that up. Britain adjusts the relief, while America brings the recovered amount back into income to the extent the loss gave you a benefit.

Platforms show recoveries separately on the statement.

Track them rather than netting them silently.

Does it count as a business?

Almost never for an individual lender. Lending through a platform is treated as investing rather than trading, which is why the losses fall into the capital category in America rather than becoming business bad debts.

Business treatment would give a far better loss result.

The bar for it is high and ordinary lenders do not clear it.

What about property-backed lending?

The interest is still interest, whatever secures the loan. Security over property affects how much you recover on a default rather than how the income itself is taxed in either country.

Recoveries on secured loans tend to be higher and slower.

That timing can push the loss and the recovery into different years.

Does the currency matter?

It does for the American figures, which are all in dollars. Interest converts at a consistent rate across the year, while a loss converts at the point the loan became irrecoverable.

Using one annual rate throughout is simplest and usually accepted.

Whichever method you pick, keep using it.

Is it worth holding at all?

That depends on the yield after both sets of tax. An American lender loses the netting relief, so the effective return is lower here than the headline rate suggests to a British investor.

Run the figures on your own marginal rate before committing.

Ordinary savings accounts avoid the loss problem entirely.

When is lending income taxable?

When the interest is credited to your account, not when you draw it out. Both countries tax lending income on that basis. Money left on the platform to lend again is still taxed in the year the platform paid it to you.

Reinvested interest is the trap here.

It is taxed even though you never saw the cash.

What rate applies to lending income?

Your top rate of tax in each country. Britain taxes lending income as savings interest at 20, 40 or 45 per cent. America taxes the same interest as ordinary income, so the rate simply follows your bracket for the year.

Neither country gives interest a lower rate.

Only dividends and gains get better treatment.

Does the treaty help?

Only a little. The treaty gives the country you live in the first claim on interest, and that is Britain. America still taxes its own citizens on that interest under the saving clause, so you claim a foreign tax credit rather than an exemption.

The credit covers British tax you actually paid.

Inside an ISA there is nothing to credit.

Do you need a Self Assessment return?

Usually yes, once lending income takes you past your personal savings allowance. Platforms pay interest gross and tell HMRC nothing on your behalf, so the figure has to come from you. Register by 5 October after the tax year ends.

The return itself is due by 31 January.

Late registration carries a penalty of its own.

Is lending income caught by the investment income surcharge?

It can be. Interest counts as net investment income, so a 3.8 per cent charge applies once your income passes the threshold for your filing status. That threshold has sat at $200,000 for a single filer since 2013.

Foreign tax credits do not reduce that charge.

So it is a real extra cost for a higher earner.

Can you offset platform fees?

Britain gives no deduction for fees against savings interest, which is a sore point for lenders. America allows investment expenses only in narrow cases. So the fees cut your return in real terms but rarely for tax.

Most platforms take the fee before crediting interest.

Where that happens, the net figure is what you report.

What if you lend through a company?

The company pays corporation tax on the lending income instead, and you are taxed again when money comes out. That adds a second layer rather than removing one. The company also becomes reportable on your American return.

Our guide to Form 5472 for UK LLC owners covers that filing.

Few individual lenders gain from the structure.

What about crowdfunding and mini bonds?

Mini bonds and crowdfunded debt pay interest too, so they follow the same path as a platform loan. Equity crowdfunding is different. A share gives you dividends and gains rather than interest, and the rules shift with it.

Check what the product really is before you assume.

The marketing name rarely tells you much.

What if the platform itself fails?

Your loans normally survive, because a wind-down plan hands them to another administrator. Recoveries then arrive slowly. Interest and losses can land in years you did not expect, which makes the American capital loss harder to use.

Keep every statement from the old platform.

They are the only proof of your original cost.

How long should you keep the records?

At least six years, which covers the enquiry window here and the assessment window there. Transaction histories vanish when a platform closes, and several have closed. Download the files each year rather than trusting the login to still work.

Keep a copy away from the platform itself.

Six years of monthly files is a large folder, but it is far cheaper than rebuilding them later.

A closed platform is the worst time to need figures.

Mistakes and penalties we see with lending income

The first is reporting the net British figure on the American return. The two calculations are not the same.

The second is leaving ISA interest off because Britain exempts it.

The third is forgetting the platform balance when testing the account reporting threshold.

The fourth is using the British tax year statement for a calendar year return.

The fifth is treating reinvested lending income as untaxed because it never reached a bank account.

How US UK Tax Accountants helps

We rebuild the calendar year figures from the transaction history, split the interest from the capital losses properly, and check the platform balance against the reporting thresholds. Then we prepare both returns to match.

Where earlier years used the wrong figures, we look at an amendment. Our US federal return service covers the filing.

If you lend through a platform and file in America, get in touch. The tax is manageable once the two calculations are kept apart properly.

Last reviewed 4 October 2026. This article is general information and not personal tax advice. Every portfolio turns on its own facts, so take advice on yours before filing.