P2P Isas: a chance to escape from the zombie accounts

The Chancellor has said we can put peer-to-peer investments in a tax-free account. How do they work and are we ready for the risks that come with them?

Simon Read
Saturday 11 July 2015 08:44
Meet the new breed: a stunt from RateSetter to highlight what it sees as 'zombie' savings rates on the high street
Meet the new breed: a stunt from RateSetter to highlight what it sees as 'zombie' savings rates on the high street

Is peer-to-peer lending set to crash into the mainstream with a bang next year?

That’s the hope of the various online platforms that make up the relatively fledgling industry, after George Osborne confirmed in his Budget on Wednesday that a new “innovative finance Isa”, allowing peer-to-peer (P2P) investments to benefit from tax-free growth, will be created from next April.

Rhydian Lewis, chief executive of RateSetter, said: “The new Isa will offer investors a much-needed middle ground between pitiful interest rates from cash Isas and the risk and complexity of stocks and shares.”

He reckons a higher-rate taxpayer using his P2P platform could save around £350 in tax by using the new Isa. Meanwhile a basic-rate taxpayer could save around £175.

P2P allows savers to lend money, in effect, to people or small firms at a rate they choose. The theory, which has worked well in the past few years, is that by doing so, you can get higher returns – and borrowers can get lower-rate loans because there’s no need to pay bank fees or similar charges.

Those who have taken the risk –and there is danger of loans not being repaid or borrowers defaulting – have got much better returns in recent years through P2P than they would have in traditional savings accounts. Additionally, many platforms have set up their own protection schemes to ensure that defaults don’t hit their users.

Zopa, the biggest P2P lender in the UK, and RateSetter offer some of the best-value deals at 5.8 per cent and 8.8 per cent APR respectively for a £3,000 loan over three years, points out Andrew Hagger of Moneycomms.co.uk. The likes of Funding Circle and relative newcomer Lending Works also offer attractive rates.

“Just because you might not be familiar with the names, it doesn’t mean you should discount them,” Mr Hagger says. “The P2P sector is now regulated and has established itself as a credible alternative to the big banks – and the rates are much better than you’ll find on the high street.”

Nicola Horlick, the City heavyweight who started up her own crowdfunding service, Money&Co, last year, said: “This marks the coming of age of P2P loans as an investible asset class. If the Government’s aim is to promote a savings economy, this is an excellent move for savers as P2P loans offer high yields. It’s also great news for borrowers.”

But Andy Caton, executive director at Yorkshire building society, warned: “It is important that those who opt to invest in the new type of P2P Isa realise how different it is to the existing choices and that they will not receive protection under the Financial Services Compensation Scheme. They will also not get ease of access to their money and could lose capital and income.”

The new Isas may not just be limited to P2P offerings. The Government has set up a consultation on whether to extend the list of Isa-eligible investments to include debt securities and equity offered via a crowd funding platform. However, that could open the door to more risky investment opportunities being included in a tax-free Isa.

“Many ordinary savers do not understand how P2P lending works,” points out Neil Faulkner of 4thWay, a P2P risk-ratings agency.

“But the Government is considering bunging start-up crowdfunding into the same Isa, when the typically low risks of P2P couldn’t be further from the always risky business of buying shares in start-ups.”

However, Julia Groves, chief executive of Trillion Fund – a crowdfunding platform that focuses on renewables and investments that fight climate change – said: “It’s a zeitgeist move from the Chancellor that recognises the value that technological innovation has brought to financial services, investors and competition in the marketplace.”

She added: “Allowing alternative finance vehicles into Isas is a huge boost to this thriving sector and should enable more people to enjoy both the potentially higher returns and the feeling of doing something different with their money.”

Innovative finance ISA what are the details?

The Treasury will create a new Isa for P2P from 6 April 2016. Zopa, one of the original P2P lenders in the UK, has analysed the Budget document to dig out more details about how it will work.

Investors will be able to withdraw any non-cash investments from the Innovative Finance Isa within 30 days. However, there will be no requirement for peer-to-peer loans held within Isas to be transferable.

It will be possible to switch existing Isa funds into one of the new Isas to retain the tax-free status.

The Government has decided not to require the existence of a secondary market or any guarantees that loans can be sold at market value as a condition of Isa eligibility.

P2P platforms will therefore not be required to provide a means for the investment to be liquidated and therefore transferred.

It will not be possible to transfer only part of the amount subscribed to the Isa in the current year.

Peer-to-peer investments held in an Isa may only be transferable or available for withdrawal when they are cash – for example, after a loan has been sold on a secondary market.

There will be no guarantee for any investor that it will be possible to withdraw or transfer their investment in all cases.

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