This is a momentous time for P2P lending (which includes person-to-business lending). Along with the Chancellor’s emergency Budget, the Treasury has published its response following its consultation on whether P2P loans should be included in ISAs. The consultation period came to an end on 12 December 2014. The report states that:
“(The government) intends to publish draft legislation for technical consultation later this year, with a view to legislating to allow peer-to-peer loans to be held in an ISA from 6 April 2016.”
This will be achieved through the creation of a third type of ISA, which will be called an ‘Innovative Finance ISA’.
The report also says that: “The government has already taken the decision to introduce this policy in order to increase the choice of investments available to ISA investors, encourage the growth of the peer-to-peer sector and improve competition in the banking sector.”
The new IFISA will take a lot of money from cash ISAs
This means that you will be able to hold loans that you have bought through Money&Co. in an ISA from 6 April next year. The ISA limit for the current tax year is £15,240 and so a couple could buy over £30,000 of loans each year and hold them in ISAs, creating a tax-free savings pool. The Chancellor also announced that he is looking at creating a pension ISA and a consultation is due to begin on this. If he does decide to create a pension ISA, then it is likely that P2P loans will be eligible to be held in these too.
I think that it is highly likely that the new Innovative Finance ISA will take a big chunk of market share away from cash ISAs. The yields on cash ISAs are pitifully low and the current gross yield across the Money&Co. loan book is 8.81 per cent. However, the government has taken the decision not to include P2P loans in the Financial Services Compensation Scheme and so your must remember that your capital is at risk when lending. However, our loans are amortising, which means that if a company borrows for five years, they have to make 60 equal monthly repayments to include a return of some of the capital and interest. This makes it impossible for a lender to lose everything, but there is still risk involved. It is essential, therefore, as I have said many times that lenders create a properly diversified portfolio and are not tempted to put all their money into one high-yielding loan.
Today’s news isn’t just good for lenders. As the government has stated, part of its aim is to make more finance available to small and medium-sized companies and to provide a more diverse range of finance options for them. Undoubtedly the creation of the Innovative Finance ISA will help to achieve this aim and so it is good news for the economy as a whole. Over 60 per cent of people employed in the private sector work for SMEs and so access to finance is key to ensuring that employment continues to expand in the UK.
We will keep you updated with progress on the Innovative Finance ISA and let you know later in the year how you can set up your Money&Co. ISA.