17th October 2014
ISAs could be in line for another shake-up as the government is considering introducing a new ISA specifically for peer-to-peer (P2P) investing.
In this year’s Budget, chancellor George Osborne announced P2P loans would qualify as ISA investments, meaning interest received would be tax-free.
P2P lending, where individuals can lend money directly to businesses and other individuals using P2P websites, has topped £1.6 billion so far. Savers have been drawn to lending through sites such as Zopa and Ratesetter, as the interest they receive for lending is far higher than they would receive on cash.
Due to the increasing popularity of P2P lending, the government is now consulting on a third ISA that would specifically house these types of investments, according to the BBC, sitting alongside the current cash and stocks and shares ISAs.
However, there is a question mark over whether the new ISA would be protected by the Financial Services Compensation Scheme (FSCS) like current ISAs as P2P lending does not fall under the FSCS.
Danny Cox, head of financial planning at Hargreaves Lansdown, said a third way ISA was needed for P2P because of the issues around the £15,000 a year ISA allowance.
P2P is treated as an investment, not as savings, because a lender’s capital and interest are at risk. However, this would limit the amount of money that could be invested in a stocks and shares ISA because under the current rules investors would not be able to invest in both P2P and stocks and shares in an ISA in the same tax year.
This would mean a £1,000 investment in a P2P ISA would rule the investor out of investing a further £14,000 in stocks and shares ISA in that tax year.
‘P2P lending is in a rapid growth phase which will be accelerated by ISA inclusion,’ said Cox. ‘It’s an interesting market and one where lenders can substantially improve their headline rates of return compared to cash accounts.
‘Investors are heavily reliant on the credit checks and risk assessments performed by P2P firms and must understand the risks that borrowers may not pay back all of the interest or the capital. It is still a relatively immature market and, unlike a savings account, investors have no FSCS protection. However regulation of the industry from last April and the potential for ISA investment next year increases the market’s credibility.’