New Rules On Peer To Peer Lending Loans

According to research, investors/savers could receive extra income of interest on their ISA (Individual Savings Account) when new rules on peer to peer lending loans are announced from April this year. However, not everybody is aware of the tax-free savings shake-up.

RateSetter, a peer-to-peer platform, run a survey and found savers could get over £500 of interest once their loans can be held tax-free, compared with usual returns of £200 in a cash ISA. Aside from that, it also found that pensioners are among the most disappointed savers when it comes to their ISA rate.

All change for savings

From 6 April 2016, savers will be able to hold peer-to-peer loans and enjoy a tax-free interest courtesy of the new Innovative Finance ISA (IFISA).

The establishment of the new Innovative Finance ISA will not only allow platforms to visibly define and explain to lenders the potential risks and rewards involved with including peer-to-peer lending as part of a tax-free investment portfolio, it will also give you a better choice in managing your money.

Savers will benefit from new rules letting £1,000 of interest to be taken tax-free.

The survey conducted by RateSetter found almost two-thirds of cash ISA holders are discontented with their present interest rate, with 74% of over-65’s displeased. The over-55’s are also dissatisfied with their rate, with 74% fed up with their cash ISA rate. Also, 60% of 45-54 year old’s were unhappy with their returns.

The chief executive of RateSetter, Rhydian Lewis said: “Savers have been offered terrible rates for years, and this survey shows they are now reaching breaking point. The launch of new innovative finance ISAs in April 2016 will put a welcome option on the table. With the majority of cash ISA holders identifying interest rates as a priority, this will give them the opportunity to increase their returns”.

What Is an Innovative Finance ISA?

The Innovative Finance ISA will let you invest your money in P2P lending platforms and pay no tax on the interest it earns. This will give you more flexibility and allow for a higher level of diversification since you will be able to decide on allocating your ISA limit across the three types.

If you’re new to peer-to-peer lending, it is a great reason to invest in the sector. If you are going to invest in P2P, the risks are higher than putting the money in cash ISA. However, the returns have also been higher for the last five years. The peer-to-peer sector has also been less unstable than the stock market.

The Treasury is also considering including crowdfunding investments within the new product.

The Treasury is yet to release the full details but, according to RateSetter, savers can only hold one IFISA at a time each year.

The returns in an IFISA may be potentially higher than the returns from a cash or Help to Buy ISA, but this also means that investors/savers would be taking on more risk. This is because even though most peer-to-peer platforms hold reserve funds, still you do not get the Financial Services Compensation Scheme (FSCS) protection that you would get if a cash ISA provider went bust.

At a glance…

Isa rules, thresholds and benefits

• The Isa allowance for the 2015-16 tax year is £15,240.
• There are two types of Isa. One for cash savings, cash Isa, and the other for investing, stocks and shares Isa.
• The Isa allowance can be split between both Isa types. Or alternatively the whole allowance can be be used for one or the other.
• Only one cash Isa and one stocks and shares Isa can be opened each tax year.
• Savings interest is tax free in the cash Isa.
• The stocks and shares Isa is virtually free of tax. There are no capital gains to pay on investment growth, but a 10% tax is deducted at source from dividends. This, however, is set to change next April, with investors receiving a £5,000 tax-free allowance.
• A new type of Isa for first time buyers, the Help to Buy Isa, was launched on December 1.
• Another new type of Isa, the Innovative Financial Isa, for peer-to-peer loans will be available from April 6, 2016.