Peer to Business Lending
Alternative Finance Sector Report - October 2014 37
PEER TO BUSINESS LENDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
November 14
AUTHOR
Luke Jackson
Samantha Goins
P2B IN SIPPS
Peer-to-peer lending through a SIPP
had previously been restricted due
to government rules which required
pension providers to hold higher levels
of capital as a buffer for non-traditional
investments, putting an immediate
stop to SIPP providers accepting these
investments. But changes to pensions
announced in this year’s Budget reversed
this, providing investors who are looking
to take more control over, and diversify
their savings, access to the P2B lending
market – and the higher returns on offer.
At present there are only two platforms
actively offering this service, ThinCats
and Assetz Capital. This service
is currently only targeted at more
sophisticated investors due to the
knowledge and experience required
to undertake due diligence and make
educated investment decisions. Other
platforms looking to offer this service
include Folk2Folk, Rebuilding Society
and Wellesley & Co.
The Assetz Capital and ThinCats
platforms allow SIPP and SSAS (small self-
administered scheme) investors access to
the P2B market, just like cash investors.
This development opens up a huge pool
of potential funds to be lent through
the P2B sector, provides more scope
for investors to diversify and grow their
pension portfolios and also allows
investors to take advantage of the tax
benefits available from investing through
a SIPP.
20% Income Tax relief for basic rate
taxpayers
40% Income Tax relief for higher rate
taxpayers
45% Income Tax relief for additional
rate taxpayers
No Capital Gains Tax
No additional tax on investment income
One key issue with SIPP based P2P
investments is the Connected Party
Rule. Some investors have already been
hit with a 55% tax charge from HMRC
where they have lent to a connected
party, such as their business or a friend.
Investors must also take into account
how the money is used, for example,
if the borrowed funds are used to buy
plant machinery, then that will be an
unauthorised payment at the point the
plant machinery is purchased, because
of the interest the SIPP then has in that
asset.
Platforms need processes and controls
in place to ensure that unauthorised
payment charges won’t apply, but
ultimately it is the responsibility of the
investor to ensure they do not violate the
connected party rule.
Guy Tolhurst of Intelligent Partnership
described the impact he sees SIPP
inclusion having on advisors:
“We are witnessing an understandable
trepidation from SIPP Operators towards
the inclusion of P2P, a third thematic
review with a focus on investment
inclusion and FCA ‘investment
restrictions’ have narrowed the SIPP
route for P2P platforms. The vast majority
of advisers still proceed with caution
when recommending anything deemed
as ‘non-standard’; implicit endorsements
such as ISA and SIPP inclusion will
undoubtedly help. However there is still
a lot of adviser education and access to
verifiable data required if we are to start
seeing P2P become more intermediated;
but with advisers having £590billion of
assets under influence it’s hard to ignore
as a route to market.”
This is likely to be a strong area of growth
for the market over the coming years,
but one that will undergo tight scrutiny
from the regulator. If this is managed
correctly it could open up the market
to a huge pool of investment, and allow
investors wanting more control over
their retirement income access to some
very exciting opportunities and strong
returns.
A CHALLENGER TO BANK
LENDING?
Indications are good for peer-to-peer
lending saying it could emerge as a
challenger to the existing model of bank
lending. Currently P2P business lending
is a small market - accounting for £120m
annually. But, based on the trends and
motivations of lenders, Nesta predicts
that P2P has potential to deliver as much
as £12.3bn in business lending annually.
INSTITUTIONAL MONEY
On the back of the success in P2P lending
and the consensus that this market has
the power and support to challenge
mainstream lenders, institutional money
has started to flow into the sector.
Hedge funds, institutions and pension
funds, all searching for massive returns,
are muscling into the P2P market,
particularly in the US. The margins in P2P
lending are too large for big investors to
ignore – banks are starting to dip into the
market.
In the US, big financial firms dominate
the two largest platforms, Lending Club
and Prosper. More than 80% of the loans
issued in March through Prosper went to
institutions. Santander Consumer USA,
the United States arm of the Spanish
bank, has an agreement in place to buy
up to 25% of Lending Club’s loans.
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More than a dozen investment funds have
been formed with the sole purpose of
investing in P2P loans.
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