P2P through SIPPs
Our regular readers will know that we are big advocates of peer-to-peer (P2P) lending, and feel this concept has the potential to challenge mainstream lending channels and revolutionise the lending sector (within time).
For those of you unfamiliar with P2P, it is a form of alternative finance that sits within crowdfunding. P2P embraces technology and uses an online platform to bypass the need for a traditional bank – to link those that want to borrow money with those that want to lend. The first P2P lender, Zopa, was launched in the UK in 2005 but it is only recently that the sector has really started to take off. With traditional lending institutions cutting back on loans to individuals and small businesses, and savers suffering from low interest rates for too long – consumers have flocked to P2P.
Platforms have different concepts (for example, Assetz Capital focuses of lending to SMEs and property developers) but the basics remain the same. You can lend from as little as £10 and choose investments to suit your risk appetite and investment strategy.
P2P within a SIPP
Peer-to-peer lending through a SIPP had previously been restricted due to capital requirements placed on pension providers for holding non-traditional investments, meaning SIPP providers gave the sector a wide birth. However, pension changes announced in this year’s Budget reversed this, enabling investors to take more control over their savings and access P2P lending – and the higher returns on offer.
A new partnership has recently been established between ThinCats and SIPPClub, advertising returns of 8-15% gross per year. Other platforms looking to offer this service include Assetz Capital, Folk2Folk, Rebuilding Society and Wellesley & Co.
P2P through a SIPP simply opens up this exciting (rapidly expanding) sector to a huge pool of capital, and allows investors to take advantage of the tax reliefs available through a SIPP to enhance returns.
Considerations
There are though a number of considerations to lending through a SIPP, on top of the risks already apparent with P2P lending. Although P2P platforms are regulated by the FCA, investors are not protected by the FSCS and do not have recourse to the Financial Ombudsman. Investors make their own personal investment decisions and should only allocate a small portion of their portfolio to P2P investments.
One key issue with SIPP based P2P lending 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 take into account how the money is used by the borrower. For example, if the borrowed funds are used to buy plant machinery, that will be an unauthorised payment at the point the machinery is purchased, due to the interest the SIPP then has in that asset.
Platforms need controls in place to ensure that unauthorised payment charges don’t occur, but ultimately it is the responsibility of the investor to ensure they do not violate this rule.
On a separate note, it looks like it could be some time before P2P lending is allowed within an ISA. Despite the chancellor announcing in the Budget that P2P would be allowed, there is to be a lengthy consultation process, and it could be 2017 before any investments are actually accepted.
Until next time,
Luke