The 2014 Budget announced that Peer-to-peer (P2P) lending will be allowed into the New ISA (NISA). After months of no news, the UK Government has finally launched a month long consultation. In conjunction with the P2P industry, the government is determining how best to include P2P investments within the tax wrapper.
The NISA already allows for up to £15,000 and free transfer between shares and cash, and including P2P loans in NISAs could be a potential “tipping point” for the P2P lending market.
The consultation will outline how NISAs will include P2P loans among currently existing investment options: shares, funds and deposit accounts or whether a separate P2P ISA should be established. While the Treasury will outline the regulation changes, no fixed dates on implementation have been set.
This new P2P lending investment opportunity will attract investors looking for higher returns of 6-10% compared to traditional saving accounts rates of only 2%. The inclusion of P2P in the NISA will allow returns to be entirely tax free.
The P2P Market
The new P2P lending products expected to launch next April are estimated to increase lending in the P2P sector from £1.8 billion to £45 billion within the next few years. This will help small businesses access the funds they need to grow, and also create much needed competition in the banking sector.
Risks and Market Matching
While the new P2P lending products will provide higher returns, investors should be aware that these are more risky investment options compared to traditional savings accounts. While not all risks can be mitigated, the government, working alongside the P2P industry, ensures that potential investors will understand the greater risks associated with P2P lending in NISAs.
Currently the P2P investments are not protected by the Financial Services Compensation Scheme (FSCS). Investors should be aware that if an investment were to go wrong, there is no available recourse.
Another concern following the regulation changes is the huge flood of ISA money into the P2P market that could cause loan providers to lower lending standards to meet the demand for deal flow.
While there is still much uncertainty surrounding P2P loans in NISAs, it is encouraging to see the UK Government continue its support for the alternative finance sector.
Consultation closes on December 12th. The consultation can be accessed here and you can send in responses to ISAPeertoPeerConsultation@hmtreasury.gsi.gov.uk