Lending ISAs: The current state of play
It was a moment of triumph for all involved with peer-to-peer (P2P) lending when George Osborne announced at last year’s budget speech that people would be able to hold P2P loans within an Individual Savings Account (ISA). Diminishing interest rates have condemned many investors to dismal returns in recent years, and the news provided a timely boost for both them and the profile of P2P lending.
The only question that was left unanswered was how this would be implemented, and which of the long-standing duo of ISA (Cash ISA and Stocks & Shares ISA) it would fall under. Given that P2P lending is a halfway house between the two in terms of risk and reward, neither wrapper could lay claim to being the perfect fit, although the latter appeared to be the more feasible choice.
However, optimism soared ever further after HM Treasury’s (HMT) Autumn communications, as news broke that a third-way Lending ISA (LISA) could be introduced, tailored specifically to P2P lending. After two months of consultation with members of the industry and the public, Government handed over the final decision to HMT, who, in collaboration with the Financial Conduct Authority (FCA), are set to announce the new structure in the summer of 2015.
What do we know so far?
The opportunity to earn tax-free returns will significantly add to the appeal of lending money with a company such as Lending Works, which already offers interest rates that, typically, are superior to those of high-street banks or building societies – albeit with the lender taking on more risk than if they were to put their money into a savings account.
At present, an individual can shield up to £15,000 (£15,240 from 6 April 2015) of their money from tax through Cash and Stocks & Shares ISAs – either by piling it all into one of them, or splitting between the two. It therefore comes as no great surprise that more than £50 billion are ploughed into ISAs each year given these tax-efficient gains. Through its inclusion within this widely-used savings and investment product, P2P lending itself stands to explode too, with it being estimated that the sector will grow from £2bn to £45bn within the space of a few years.
Being incorporated into ISAs represents great progress regardless of the chosen structure, but having a separate LISA will not only enhance this growth, but also avoid many complexities with implementation and aid differentiation. In addition, it will give consumers a mid-choice between higher-risk Stocks & Shares ISAs and lower-risk Cash ISAs, and in turn enable P2P lending companies to clearly define and communicate the rewards and risks involved. The fact that 95% of existing customers in the industry favour the introduction of LISAs also lends considerable credence to an already-strong case.
What happens next?
As mentioned above, HMT will be announcing their decision in the summer, and should they propose the creation of LISAs, these are forecast to come into being as early as the third or fourth quarter of 2015. At Lending Works, we’ll use the time in which we’ll have to prepare to ensure that we can offer LISAs to our lenders immediately after the new structure comes into place.
Should the policy statement go the other way, and P2P lending be placed within the Stocks & Shares ISA, we’ll probably reflect on a bitter-sweet result, and perhaps wonder what could have been! However, we are not ones to dwell. Once the implementation process has been made apparent, we’ll ensure that we are equipped to clearly explain these changes to our customers, and duly have the necessary systems in place so that lenders can easily transfer and set up their ISA with Lending Works.
So is it make or break that a third category of ISA is created?
Even if this less-favourable outcome above were to eventuate, it will still allow a huge amount of the interest earned by lenders to be protected from tax, and thus add a new dimension to (tax-free) diversified savings portfolios across the board.
The inclusion within ISAs will also augment the flexibility and accessibility of P2P lending, and, coupled with these increasingly lucrative returns, will bring many more lenders to the table. So no matter which way the cookie crumbles, the announcement will represent a landmark day in the history of P2P lending, and one which should be celebrated by both Lending Works and their customers.
- HMT confirms new third-way Innovative Finance ISA
- Your updated guide to Innovative Finance ISAs
- Innovative Finance ISAs: The force to awaken P2P lending
- How will transferring old funds into an IFISA work?
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