HMT confirms new third-way Innovative Finance ISA
All eyes were on the House of Commons on Wednesday as Chancellor of the Exchequer George Osborne delivered the first Conservative Budget in more than 18 years. Of course, many will have had their own views and agendas going into the ‘emergency’ speech, but here at Lending Works, the issue which had us on the edge of our seats was whether the proposed Lending ISA (Individual Savings Account) would be announced.
At Budget 2014, Osborne announced that P2P was set to be included within the current ISA framework, and momentum increased further as HM Treasury (HMT) announced in their Autumn Statement that a standalone Lending ISA – tailored specifically towards peer-to-peer lending – could be introduced.
The apparent alternative was that it would fall under the existing Stocks & Shares ISA. Given P2P’s vastly different profile in terms of risk and reward, we felt it would be something of a misfit in such a wrapper, and thus waited with baited breath for the verdict from HMT (and the FCA, with whom they collaborated over the decision).
And so, IFISA was born
News then emerged shortly after the Chancellor concluded his Budget speech that a new ISA had indeed been created, although it wasn’t the one we had perhaps originally expected. Instead, it was announced that ISA eligibility would be extended by virtue of a new Innovative Finance ISA (IFISA) which would cover loans arranged via peer-to-peer lending platforms. This is set to come into effect from 6 April 2016.
In addition, it was conveyed that Government had published a consultation on whether to extend the list of ISA eligible investments within this new wrapper to include debt securities and equity offered via a crowdfunding platform.
In essence, this translates into an ISA not exclusively geared towards lending, which might be regarded as a shame in some quarters. By allocating peer-to-peer its own wrapper, platforms like Lending Works would have been well-placed to clearly define and communicate to customers the risks and rewards involved with incorporating P2P into their tax-free portfolios.
Nevertheless, 8 July 2015 will go down as a landmark day in our sector, and IFISA is a game changer for our industry which should be celebrated. Brits have been subjected to poor returns on their money for many years, and this new form of ISA will further open the door to healthy returns through peer-to-peer lending, with the additional carrot of a considerable tax saving.
Indeed, IFISA could also prove to be a leveller for the ISA industry as a whole. Presently, a handful of providers are dominating a market set for tremendous growth. However, the introduction of a third-way ISA will enable P2P platforms to compete directly with these larger firms, rather than be reduced to the chasing pack of a vast variety of ‘investment options’ within the existing Stocks & Shares ISA.
Simpler for consumers
One of the questions raised during the IFISA consultation related to clarification for investors in terms of the different rules associated with peer-to-peer loans, and whether a new type of ISA aimed at alternative finance products was merited as a result.
The response was comprehensive: “Nine out of ten respondents felt that a third ISA category would be helpful in distinguishing peer-to-peer loans and highlighting the different rules that apply to them, and the fact that peer-to-peer loans are not protected by the FSCS (Financial Services Compensation Scheme).
“Many of those who supported a third ISA type felt that separating peer-to-peer loans from stocks and shares would keep the different ISA investment types separate, and thus easy for investors to understand.”
The full response to the consultation on including peer-to-peer loans as an ISA qualifying investment is available here, and clearly outlines how this exciting conclusion was reached.
What does it all mean for me, the lender?
The long and short of it is that from 6 April 2016, those lending via peer-to-peer will be able to set up an IFISA with an individual platform such as Lending Works. The ISA allowance for the current financial year is £15,240, and it is expected that this threshold will increase for the next financial year too. So lenders will be able to contribute up to £15,240 into their P2P lending account through an IFISA each year, with any interest received tax-free.
Of course, if the lender utilises either (or both) of the other ISA wrappers, this allowance will need to be ‘shared’ (ie: the allowance covers all three categories). Deciding on the optimum allocation to invest within each ISA type in order to get the most out of their portfolio will be down to the lender's individual preferences and risk appetite.
However, regardless of the amount allocated to P2P loans within the new IFISA, what is guaranteed is that you as a lender will be better off from April 2016, with greater levels of choice about how to manange your money. And, to make things even better, IFISA will coincide with the launch of the new personal savings allowance, meaning lenders can receive up to £1,000 in interest on their P2P loans without being liable for income tax!
For us, the IFISA implementation process has now begun in earnest, and we will be hard at work to ensure that you can start enjoying tax-free returns on your money as soon as they go live.