Peer to peer lending websites: Innovative finance Isas explained
In his summer 2015 Budget, chancellor George Osborne unveiled plans to allow individuals to include peer-to-peer (P2P) loans in a tax-free Isa. Although in theory this presents an interesting choice, we have yet to see any major P2P providers make such products available due to an overburdened financial regulator.
Should you wait for the arrival of the innovative finance Isa (Ifisa), or should you go ahead and invest in P2P now? Read on to find out everything you need to know.
What is an innovative finance Ifisa?
An innovative finance Ifisa is an Isa that contains peer-to-peer loans instead of cash (as in a cash Isa) or stocks and shares (as in an investment Isa).
In brief, P2P loans are loans made from one individual to another individual or business via a website, or platform. The three such sites most used by our readers are Funding Circle, RateSetter and Zopa – click on the links below to read their reviews.
When you lend money through a P2P site you will in theory earn a return based on the interest paid by the borrower. These rates can vary and can be affected by bad debts and liquidity – although many sites have safeguards to mitigate these issues.
Read more about the basics in our P2P lending guide.
From April of this year, legislation allows you to save P2P loans in an Isa wrapper, meaning any money you make is totally free from tax. The Ifisa counts towards your overall Isa allowance, which for the 2016/17 tax year is £15,240 (rising to £20,000 in the 2017/18 tax year).
Do you need an Ifisa?
Although it’s a growing sector, P2P is mostly untested in a credit downturn, when default rates might surpass whatever safeguards the various platforms have in place.
All the same, you may well want to dabble in this type of investment in light of poor interest rates, or even out of simple curiosity.
But do you actually need a special P2P Isa? That depends on what other savings you have, and how much you earn off them. The government recently introduced the Personal Savings Allowance, which means the first £1,000 of interest you earn on savings is tax-free, including interest earned on P2P loans.
At time of writing, the projected rate of return on Zopa’s Classic loan product is 4.3%. This means you’d have to loan more than £23,000 in order to use up your Personal Savings Allowance for the year, if you had no other sources of savings interest.
Companies we have spoken to suggest their Ifisa rates will be the same as their non-Ifisa rates, so considering how little money cash is making at the moment, this suggests you would have to save quite a bit before having an Ifisa would become a necessity.
This is all great in theory, but in practice the launch of the Ifisa has been severely delayed. Some smaller platforms, including Abundance (an ethical investment company) and Crowdstacker (which offers P2P investment in businesses), have been authorised to offer these products, but due to the Financial Conduct Authority taking over regulation of the sector recently and having to deal with a huge backlog of applications, the larger P2P firms including Funding Circle, RateSetter and Zopa, have not yet received the official permission they need to launch such a product.
The Ifisa was supposed to be available from April, but, at time of writing, no major provider has been able to offer one.
Read our reviews of the three most-used lending platforms here:
To wait or not to wait?
The truth is, we just don’t know when the largest P2P providers will be able to launch their Ifisas. It could be as late as this autumn. So should you hold off making P2P loans until then, or should you go ahead now and launch an Isa when they become available?
There are a couple of things to consider here. First of all, remember the annual savings allowance as mentioned above. If you’re only investing modest amounts then you’re not likely to benefit from an Isa – the first £1,000 of interest you earn would be tax-free anyway (£500 if you’re a higher-rate taxpayer).
You should note, however, that as it stands you will not be able to simply shunt your existing P2P loans into an Ifisa when they launch. Through a quirk in regulation, you would have to sell them – incurring any early exit charges that apply – and then make those loans again at whatever new rate applies at the time. This means you can’t just make non-Isa loans now and bring them into your Ifisa when you open one.
Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.