Peer to peer lending (P2P) got a significant filip when the government announced in the 2014 Budget it would allow it to be packaged into a new Innovative Finance Isa.
From 6 April this year, any gains made through P2P lending will qualify for tax advantages, where such lending is made within the new Innovative Finance Isa Wrapper.
The Innovative Finance Isa can be, according to Tax Incentivised Savings Association chief operations officer Carol Knight, invested in qualifying innovative financial products.
According to HM Revenue & Customs (HMRC), legislation was amended to allow this third type of Isa, in addition to stocks and shares and cash Isas.
Key features
Innovative Finance Isas are subject to the same annual maximum allowance as other adult Isas.
P2P lending platforms can get authorisation to act as Isa managers, while existing Isa managers can choose to offer P2P loans within an Isa.
Investors can invest through the P2P lending space into entrepreneurial British companies, within the tax-effectiveness of an Isa wrapper.
Any loan repayments, interest and gains from P2P loans will therefore not be subject to tax.
Under current legislation, P2P loans held within Isas are not transferrable.
As at July 2015, few Isa managers said they were “not currently considering offering P2P loans within an Isa, but would consider doing so depending on the way the P2P market develops and the experience of P2P platforms’ inclusion within Isas”.
This was the finding published in the HM Treasury Isa Qualifying Investments: Response to the Consultation on Including P2P Loans paper.
While more competition should be positive news for investors, with it comes increased risk that all providers might not be of suitable quality Patrick Connolly P2P loans cannot be packaged into a Junior Isa, only an adult Isa, the paper also stated.
“The government has decided not to make P2P loans eligible for its tax-advantaged children’s accounts as holding such loans in these accounts could restrict the diversity of investments which can be held in these accounts for children.”
Advantages
Simon Bashorun, financial planning team leader at Investec Wealth and Investments, said: “The access to unorthodox ideas such as P2P lending and crowdfunding investments within a tax-free Isa wrapper is a welcome benefit.
“Rates on offer can also be more attractive than cash accounts within standard cash Isas.”
Another advantage, according to Chase de Vere certified financial planner Patrick Connolly, is that investing in an Innovative Finance Isa does not preclude people from investing in a cash or a stocks and shares Isa during the same year, therefore giving greater flexibility.
Disadvantages
However, Mr Connolly highlighted: “Investments which offer higher returns typically come with more risk and as the P2P market continues to grow and develop, we are likely to see new entrants entering the fray.
“While more competition should be positive news for investors, with it comes increased risk that all providers might not be of suitable quality.”
Ms Knight noted some Innovative Finance Isa investments may have to be withdrawn in cash, adding: “withdrawals cannot be replaced without this counting towards the annual allowance”.
Tom Williams, chartered financial planner for WH Ireland, pointed out funds will generally be ‘locked’ and inaccessible for an agreed term.
Another risk is the sort of people who might be attracted to such investments.
During the consultation in 2014, according to the HMRC’s December Policy Note, Income Tax: Innovative Finance Isa and P2P Loans, the Financial Conduct Authority (FCA) did identify particular groups of people for whom such crowdfunding platform-based Isas might prove a risk.
These were:
■ Those with learning difficulties or cognitive limitations, who may have limited capacity to understand fully the risks associated with loan-based crowdfunding.
■ Individuals approaching retirement and considering their options under the new pension freedoms, who may choose to invest in loan-based crowdfunding, failing to realise it is a much higher-risk alternative to buying an annuity.
■ Individuals in retirement, who may have significant sums in savings and may be concerned about low interest rates. This may lead them to search for higher yields elsewhere, which in turn may lead them to invest significant amounts in loan-based crowdfunding platforms, potentially taking inappropriate levels of risk with their money.
■ Young and inexperienced investors, who may be attracted to the concept without a full understanding of the risks involved, especially in the web-based and ‘social-networking’ environment of crowdfunding.
Mr Williams agreed: “Young and inexperienced investors may be attracted to by the social networking environment without understanding the risks.”
