5 Peer to Peer Lending Tax Tips for the New Tax Year
With the 2017-18 tax year ending, we welcome in 2018-19. In years past, the peer to peer lending (P2P) industry has seen distinct changes occur at this time of year. In April 2016, the Innovate Finance ISA (IFISA) was launched and advisers were given permission to recommend P2P investments. Although there has been no major policy changes this time around, all major P2P lenders are now offering ISA wrappers. This is the first-year investors are able to think more strategically about their decisions, without the limitations of product availability. Below we’ve provided five top tax tips for the new tax year, some related to P2P, some more general.
1. Use ISA transfers to diversify between P2P lenders
You are only able to open one IFISA per tax year with new ISA money. This proves an issue when trying to construct a diversified portfolio as it leaves investors exposed to the platform originating the loans and the type of loans the platform originates.
However, it is possible to open multiple IFISAs if transferring funds from an old ISA into a new IFISA. So, you can open a number of IFISAs and transfer funds from an older Cash or Stocks and Shares ISA, this way creating a diversified portfolio of IFISAs – bear in mind, you cannot subscribe current tax year subscriptions to more than one IFISA.
2. Remember your personal allowance
If opening multiple Innovate Finance ISAs by transferring from old ISA monies seems too painful, you could instead use your personal allowance and invest without an ISA wrapper. The allowance is £1,000 for basic rate taxpayers and £500 for higher rate tax payers. Orca offers the ability to invest across the P2P market, whilst achieving a 5% net return. With a 5% return, a basic rate taxpayer could invest £20,000 and receive £1,000 interest tax free. Similarly, a higher rate taxpayer could invest £10,000 before paying tax on the £500 earned.
3. Invest your funds early
The tax year ending is a deadline and human instinct is to wait until the deadline before taking action. However, investing early means you gain the benefit of a full year of tax free returns.
There are now over 24 P2P Platforms offering the Innovate Finance ISA and 10 further providers offering debt-based securities such as Crowd Bonds. You can find a full list of IFISA providers on Orca’s 'IFISA Tracker' page.
4. Under 40, saving for retirement or buying a house? The Lifetime ISA is a great tax incentive.
When constructing the Orca Investment Platform, we considered our target demographic and seriously considered whether it would be possible to reach a younger audience of investors, specifically people below 40.
Our conclusion was that people below the age of 40 who don’t own their own home would choose a Lifetime ISA. The benefits are simply too good to compete with.
The lifetime ISA is a tax-free wrapper that lets people under 40 invest £4,000 per year in cash or in stocks and shares. The government will add a 25% bonus on top of the principal so if the maximum of £4,000 is allocated, the government will add £1,000. To be eligible for the bonus, funds must be used to purchase a house or to save for retirement. There are penalties for people withdrawing early for other purposes, creating a carrot (bonus) and stick (penalty) effect.
The Lifetime ISA has experienced strong uptake, but, again similarly to the IFISA, even a year after launch only a few providers are offering this product. Nutmeg and Hargreaves Lansdown are notable providers on the list.
5. Invest through a pension
The pension industry is rightly experiencing trust issues, particularly amongst younger people. Even with the lack of trust and knowledge, the tax benefits of investing through a pension far outweigh the option of opting out.
Paying into a pension has multiple benefits, above the actual investment itself:
- Employers are obliged to contribute between 1%-3%
- Contributions are paid gross of tax, reducing your taxable income
It is possible to invest in P2P lending through a SIPP, however this can be expensive so the tax benefits only make sense for larger amounts. Morgan Lloyd offers a SIPP, which accepts P2P assets from a range of providers.