The meteoric rise of peer-to-peer lending (P2P) in the UK has seen the industry double in size to £4.4 billion during 2015. This has firmly changed the question on investors’ lips from “What is P2P lending?” to “Which platform should I choose?"
This year, the elevation into the mainstream will be complete with the introduction of the new Innovative Finance ISA (IFISA), which goes live on 6 April and will allow lenders investing in peer-to-peer loans to shield interest earned on these from tax, provided that they are held within this IFISA.
We continue to field calls and enquiries on a daily basis querying all aspects of the new IFISA, such as how it will be implemented and the rules surrounding it. Yet the truth is that with fewer than 60 days to go until lift-off, we as a sector are unable to provide complete clarity given that a great deal of the finer nuances involved are still under consultation with HM Treasury.
So, we thought we’d bring you up to speed on the most compelling developments, and hopefully answer some of the questions you may have…
What is an Innovative Finance ISA?
After years of campaigning, the peer-to-peer industry landed the ultimate coup as it was confirmed by the Treasury that, from the 2016/17 tax year, savers and investors will be able to allocate some or all of their annual ISA allowance (£15,240 for the 2015/2016 financial year) to the new IFISA. The IFISA becomes the third ISA category, alongside the existing cash ISA and stocks & shares ISA, and sits somewhere between the two in terms of risk and reward.
The possibility that equity crowdfunding could be included within the IFISA is ongoing, but as it stands peer-to-peer lending platforms will be the sole providers of the product. One thing that must be remembered is that, unlike a cash ISA, there will be no cover from the Financial Services Compensation Scheme for money held within an IFISA.
Will I be able to transfer my existing ISA money into an IFISA?
Absolutely. If you already have money in a Cash ISA there will be nothing stopping you from transferring it into your new IFISA. This also applies to Stocks & Shares ISAs, provided of course the stocks and shares are converted into cash first (eg: by selling them). These transfers will not impact your ISA allowance for the current tax year. Your ISA allowance as a whole can be spread across each of the ISA categories - Cash ISAs (which includes Help to Buy ISAs), Stocks & Shares ISAs and IFISAs. What's more, there is no upper limit to the amount you can transfer from pre-existing ISA monies, accumulated over previous financial years - nor on the amount of IFISAs you have with different P2P platforms in order to house these 'old' funds. You can read more about this by clicking here.
But remember that you can only subscribe new funds with one ISA manager within each category in the same financial year, though you can choose how much of your annual ISA allowance you want to allocate to each one.
Will I be charged a fee for opening my IFISA, and will the rates be the same?
No. We have no plans whatsoever to charge a fee for opening an IFISA with Lending Works. So, whether you choose to make use of the new ISA wrapper or not, you will not incur any fees for lending.
In keeping with the above, we can also confirm that the usual lender rates will also apply to P2P loans within the new tax-free ISA. Of course, as a marketplace, our rates are subject to weekly updates, but we see no reason why those making use of the ISA wrapper should be offered an inferior rate to those who aren't.
Will I be able to transfer my existing P2P loans into an IFISA?
At the moment, the answer is no. It is something which has been discussed at length during the consultation, but government legislation has put an end to any hopes for those hoping to transfer existing P2P investments into the new IFISA wrapper. That said, we will continue to discuss options and mechanisms with HMT, with the hope that we can achieve this goal.
Are there any workarounds for transferring my existing P2P loans into an IFISA?
The only available option as the legislation currently stands would be to exit your existing loans and buy new loans within an IFISA. However, we understand this is not a great customer experience, hence our drive to continue working with HMT on a better solution.
What is the Personal Savings Allowance (PSA), and how can I use it to my advantage?
As mentioned above, you’ll be free to transfer existing funds from your Cash and/or Stocks & Shares ISA to your new IFISA. However, it’s worth considering whether to first make use of your Personal Savings Allowance (which also comes into effect on 6th April). With the PSA, basic rate tax payers will be able to shield interest (on savings accounts and peer to peer loans) of up to £1,000 per year from tax, while for higher-rate tax payers this figure drops to £500. So for a higher-rate tax payer, you’re looking at shielding a capital amount of roughly £10,000 from tax via the PSA alone, before even starting to use your ISA allowance. Bear in mind too that returns from Stocks & Shares ISAs will not be eligible for the PSA.
For more information on the Personal Savings Allowance, please click here.
Can I have multiple IFISAs with different platforms?
With regard to newly-contributed ISA funds, the answer here is a negative (unlike the case of ISA monies accumulated over previous years, as explained above). For each financial year, you will only be able to subscribe to one IFISA, and with one platform. If you wish to contribute to an IFISA with a new provider, you will have to wait until the following tax year. However, you can read this article for more information on subscribed ISA funds, and also some credible workarounds if you wish to change IFISA provider during the financial year.
Are platforms going to be ready to offer them on 6 April?
We were born ready! Unfortunately, this isn’t entirely in our hands. It is certain that only platforms with full FCA authorisation will be eligible to offer IFISAs. We, like the other major platform operators, await confirmation of full authorisation from the FCA. We remain confident of receiving authorisation in time to apply to HMRC to become an ISA Manager by 6 April. Only then will we be able to provide IFISAs.
But, as soon as we’ve got the green light, you’ll be the first to know!
Is there another way to ensure I can have an IFISA when the tax year starts?
The possibility of independent ISA managers being used as an intermediary to allow consumers to invest through the Innovative Finance ISA had been mooted as an option if platforms weren’t ready by 6th April. However, this will no longer be possible, even as a temporary stop-gap, as the current proposal states that only P2P platforms will be able to offer IFISAs.
So will the big day be a damp squib?
Certainly not. With nearly two months still to go, there remains every chance that we will have received the necessary approval from the FCA in time, and be ready to bring you a product that will take returns on peer-to-peer lending to another level. Besides, we are very much in support of the process, as it is imperative that platforms who are eligible to offer Innovative Finance ISAs are equipped to do so in the best possible way, and have withstood the necessary scrutiny in order to be fit for purpose.
In the short run, it is anticipated that the P2P sector will rocket to £50 billion by 2018 as a result of IFISA (and, to a lesser extent, the Personal Savings Allowance). And in the long run, there is every chance that this exponential growth will continue. The basis for long-term success for both platform and investor through IFISA is solid foundations. We’ve been putting ours in place, one brick at a time. And we’re excited for you to start reaping the benefits very soon!
- Innovative Finance ISA: The force to awaken P2P lending
- Cash ISA returns: The shame of high-street banks
- The Innovative Finance ISA debt vs equity conundrum
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