From 6th April 2016, it should be possible to invest tax free in peer-to-peer (P2P) lending within ISAs[footnote]Individual Savings Accounts[/footnote].

As with other ISAs, you are only able to subscribe to one provider in any tax year – since I have invested in several P2P lenders, I’m likely to convert one of those accounts into an ISA.

Anyway, to explain more in detail about P2P and these new Innovative Finance ISAs, here’s a guest post (a first on this blog!) from Michael Todt of Lending Works:

Peer-to-Peer Lending Continues To Rise in Popularity

The impact of peer-to-peer (P2P) lending  on the market for investments and financial services in the UK is no longer the well-kept secret it once was, and this was well illustrated by another stellar year in 2015, in which it reportedly swelled to £3.2 billion – up by some 84% on 2014.

Certainly, the P2P sector has provided a welcome alternative for investors in a climate dominated by record-low interest rates, derisory returns on savings and Cash ISAs, and a hugely volatile stock market. As a lender through these types of platforms, you are forced to take on a risk to your capital, as funds invested are not covered by the FSCS[footnote]Financial Services Compensation Scheme[/footnote] in the event of borrowers (to whom the loans you purchase are allocated) defaulting and/or the platform going bust.

However, the UK’s major platforms have countered this with safety measures such as segregated provision funds, and even an insurance against borrower default in the case of Lending Works. Platforms are also obliged to operate under FCA[footnote]Financial Conduct Authority[/footnote] authorisation as of October 2015 too, while eight of the top P2P providers are members of the P2PFA[footnote]Peer-to-Peer Finance Association[/footnote]; an industry body that sets out a strict set of operating standards to which all members must adhere to.

Benefits of the Innovative Finance ISA

Such regulation, and, of course, continued success within the P2P lending resulted in a tremendous coup too, as it was announced at last year’s Summer Budget that a new Innovative Finance ISA (IFISA) category – for which only P2P lending is eligible at this stage – will go live in the next tax year.

Lenders have already been able to benefit from annualised returns of 6% and above, but the tax efficiency of investing within an ISA wrapper is set to bring tremendous benefits for consumer lenders, and it is predicted that the industry will skyrocket over the next couple of years to £50 billion as a result of the influx of new investment.

The implementation of IFISAs has proved to be an extensive process. Firstly, only platforms which have received full authorisation from the FCA will be eligible to offer IFISAs. The major platforms – currently operating under interim permissions – are awaiting this confirmation as the go-live date for IFISA of 6th April rapidly approaches, but FCA approval should be imminent.

Once the I’s are dotted and the T’s crossed, individual investors will then be able to subscribe some or all of their annual ISA allowance (£15,240 for the 2016-17 tax year) to an IFISA, albeit with only one platform for each financial year. However, this restriction will not apply to funds held within other ISA categories, accumulated over previous financial years, meaning investors can diversify across multiple IFISAs in the case of ‘old’ ISA funds within the same tax year.

There are numerous other nuances which are well explained in this article, and it goes without saying that it is imperative to do your own research and educate yourself as much as possible on what is a brand new investment product before taking the leap. But there is no doubting the potential for this sector to bring tremendous benefit to consumers in these difficult times. As with anything, it makes sense to diversify your portfolio, and to allocate your assets entirely to IFISAs and/or P2P lending would carry tremendous risks.

But as the industry continues to grow at a rapid rate, and harness a good degree of credibility in the process, it is making a strong case for warranting serious consideration as one of the better places to accommodate a large share of your savings and investments.

Notes:

1 – Individual Savings Accounts
2 – Financial Services Compensation Scheme
3 – Financial Conduct Authority
4 – Peer-to-Peer Finance Association
And yes, I have an account with Lending Works