Orca Money thinks
Peer-to-Peer Lending (P2P) is becoming an even more attractive investment option with the introduction of the new Innovative Finance ISA (IFISA).
The ‘Peer-to-Peer ISA’, as some are calling it, will encourage existing P2P investors, who may have only tested the waters with small deposits, to invest more with a government policy adding some relative comfort. If you are new to P2P lending and deciding on how to allocate your new ISA allowance, a P2P investment could be a good option.
– Giles Andrews, Zopa Founder and CEO
What is an ISA?
Let’s start simple. An ISA, or Individual Savings Account, is an account that gives you tax relief on the interest you earn up to a certain amount of saved or invested funds. This means you do not pay tax on the interest you earn. ISAs are sometimes referred to as ISA wrappers.
The HMRC has set out basic rules that govern ISAs. Each year you are given a new allowance of money, which can be held in an existing or new ISA. From, April — April, 2015/2016, the maximum allowance of deposited funds is set at £15,240, effectively providing tax relief on any interest you earn from these funds. It is important to note that you can build your ISA allowances up over the years, so you can accumulate allowances, which can be spread amongst your ISAs however you deem appropriate. You can also transfer between ISA accounts, but there has been adaptation to fit the IFISA as explained further below. Also, be aware, once you withdraw from your ISA you lose that part of your annual allowance.
There are two ISA types currently available and you are free to allocate your allowance across the two ISA types:
- You do NOT pay tax on the interest earned on the cash you save in this account. This is unlike a normal Savings Account, which is taxed 20%. It is your responsibility to declare the tax that you own on your interest earned.
Stocks & Shares ISA
- Invest in funds, bonds and shares in companies within this account. Again if you are investing outside an ISA it is your responsibility to declare the interest you have earned and pay the tax due.
Innovative Finance ISA (IFISA) headlines
It was announced in the summer of 2015 that ISAs are to be revamped and the good news is the changes are positive for peer-to-peer investors. After a period of applied pressure and eventual consultation, the Government announced the Innovative Finance ISA in their Summer 2015 budget. Here are the headlines from the announcement:
- 6th April 2016, IFISA arrives.
- £15,240 allowance to be spread between the three available ISAs. You choose the spread.
- Peer-to-peer platforms can act as ISA Providers, sometimes known as ISA Plan Managers without legally owning or co-owning the loans.
- ISA transfers and withdrawals adapted to fit illiquid nature of P2P. (Explained below)
How does the IFISA work?
The basic rules of ISAs apply for the IFISA. However, new rules have been introduced to accommodate the different nature of peer-to-peer investments. These rules and guidelines are yet to be determined but largely relate to transferring between ISA accounts and withdrawing from your IFISA.
How do I transfer my ISA allowance from one ISA to another?
Currently, you can transfer your ISA allowance between different ISAs, and this is set to continue. There are, however, some nuances in P2P lending that add some complexity to the situation. Generally, peer-to-peer platforms offer early access to your money, however it is dependent on new investors (lenders) coming to the platform. This is unlike Stocks and Shares where you can easily sell your investment on the market to gain early access to your money. The ease of selling your investment is known as liquidity and peer-to-peer investments are considered relatively illiquid. The illiquid nature of peer-to-peer investments creates problems when transferring between ISAs. ISA standards have been adapted to accommodate the lack of liquidity in the peer-to-peer lending industry: invested funds, including interest earned, can’t simply be extracted on a whim.
With Cash and Stocks & Shares ISAs, the ISA provider must facilitate the withdrawal of cash from your ISA within 30 days. As P2P products are considered relatively illiquid the 30-day withdrawal timeline has been elevated for the new IFISA. P2P investments held in your IFISA must be transformed into cash, i.e: sold to a new investor (lenders) with your chosen peer-to-peer provider before your investment can be transformed and withdrawn as cash, and there is no set timeline set.
These specific rules and guidelines will be issued to P2P platforms, so ensure and query with your chosen platform when opening an IFISA for a fuller understanding of how your Innovative Finance ISA works.
Who is my Innovative Finance ISA provider?
It is understood that you can open an IFISA with a given peer-to-peer platform, let’s say Zopa. You can then invest upto the stipulated yearly allowance of £15,240, as it currently stands, which will give you non-taxable interest on the interest earned from your Zopa investments. Be aware though, if you take out an IFISA with a platform, Zopa for example, you will not be able to hold other P2P investments in the same account.
Presently, you may only open your IFISA with a P2P platform, and not your existing ISA manager. Some investment platforms, like Stockbroker stalwart Tilney Bestinvest, have declared that they will not be offering the Innovative Finance ISA anyway, but how are other investment platforms gearing up for this change? That remains to be seen.
(*Update July 2016)
Peer-to-peer platforms offering the IFISA
This SME focused peer-to-peer platform allows you to manually select British businesses to invest in. They are one of few platforms authorised and regulated with HMRC permissions allowing them to offer the Innovative Finance ISA.
Here are the loans you can invest in with Crowdstacker:
Target raise: £10million
Raised to-date: £5,437,117 (since Q4 2015)
Interest rate: 6.39% per annum
Term: 12, 18 or 36 months
Security: £45m assets
Min investment: £1,000
Next closing: 22nd July 2016
Target raise: £3million
Raised to-date: £3,163,095
Interest rate: 6.8% per annum
Term: 3 years
Security: residential property
Min investment: £700
Next closing: 22nd July 2016
With Crowd2Fund, similar to Crowdstacker, you manually select British businesses to invest in where a personal guarantee is taken to secure the loan.
Interest rate: 8.7% per annum (average)
Min investment: £250
What are the P2P Platforms saying about the Innovative Finance ISA
We are excited about the new Innovative Finance ISA as it will increase the overall yield on an already astounding 12.68 per cent per annum when you take tax savings into account. It is positive that the Government is showing support for our industry and recognising the value and strength of the crowd funding marketplace. The ‘too-big-to-fail’ banks and funds are a systemic risk to the market and any attempt mitigate this risk should be encouraged.
– Liam Brooke, CEO, Saving Stream
The IFISA is a positive step in increasing consumer awareness and trust in the sector, as well as providing a tax efficient way of benefitting from the platforms’ offerings. P2P IFISA investors will be tax incentivised, and therefore likely to be risk averse which is good news for secured lending platforms like Landbay.
– John Goodall, CEO and Founder, Landbay
The innovative finance ISA is scheduled to launch on 6 April 2016, and RateSetter is working hard to build a market-leading ISA product for our investors.
Of course, there’s still much more detail to follow, so RateSetter will be keeping investors regularly updated as our ISA proposition approaches its launch date. Anyone who wants to find out more about the RateSetter Innovative Finance ISA can do so on our IF ISA page.
– Colin Hodges, Head of Investor Operations, RateSetter
You should remain conscious that peer-to-peer lending is not covered by the Financial Services Compensation Scheme, and this will not change in-line with the Innovative Finance ISA. Government consultation is on the horizon to review this, with the possibility of FSCS coverage being introduced.