Savers seeking a better return on their money could be given a boost as talks about including peer-to-peer and crowdfunding investments in Isa wrappers take place ahead of the Budget.
Her Majesty’s Treasury is currently working with peer-to-peer and crowdfunding platforms to explore how these alternatives to traditional savings and investments could be included in a stocks and shares Isa wrapper, potentially from 2015 if not before.
Peer-to-peer sites match up savers, who are willing to lend, with borrowers – either individuals or small businesses – and rates can be better than those offered by banks.
However, with high rates comes added risk – most notably the fact you might struggle to get your money back if a site goes bust because peer-to-peer sites aren’t covered by the Financial Services Compensation Scheme (FSCS) which guarantees your savings up to the value of £85,000.
Go further: Find out how peer-to-peer lending works in our guide and read our reviews of peer-to-peer sites.
Peer-to-peer lending, crowdfunding and Isas: how would it work?
If Chancellor George Osborne announces in his Budget that peer-to-peer investments are to be included in stocks and shares Isas nothing will happen before regulation of the alternative finance industry kicks in at the beginning of April this year.
Should the move take place, it’s likely that savers would be able to use up their annual Isa allowance in this way – for the 2013-14 tax year, every adult has an overall Isa allowance of £11,520, up to all of which can be invested in a stocks and shares Isa. However, you can also currently invest up to half of your allowance, £5,760, in a cash Isa.
It’s believed that people will be able to invest in more than one peer-to-peer or crowdfunding platform in any given tax year so investments could be spread across a number of different sites in a bid to minimise risk.
However, the stocks and shares Isa wrapper is only expected to cover debt, or loan-based, investments rather than equity crowdfunding – which is where lots of investors can either buy shares in start-ups, with a view to selling them on at a profit or receiving a payout at a later date – or rewards crowdfunding, which is where investors can receive more tangible rewards such as a copy of the product they invested in.
In time, it’s also believed that savers will be able to transfer in previous years funds into stocks and shares Isas held in peer-to-peer platforms.
Some issues to work out
However, one of the main sticking points is whether savers will be able to invest in a stocks and shares Isa in both a peer-to-peer platform and more traditional channels linked to the savings scheme like unit trusts, open-ended investment companies (OEICs) and investment trusts, as well as government bonds and corporate bonds, at the same time as there is a question mark over who would be responsible for the Isa.
While that and many more details are yet to be finalised, industry experts are confident this will be implemented at some point in the future.
Meanwhile, the British Business Bank has announced it is planning to invest a further £40m in small businesses through peer-to-peer platform Funding Circle.
The investment activity is expected to support around £450m of lending over the next 18 months. To date, the government has invested £85m in small businesses through alternative finance platforms.