The government has finally confirmed plans to introduce an ISA that will cover peer-to-peer loans. The move will see tax bills for a large number of Zopa customers slashed or wiped out altogether.
From next April, an Innovative Finance ISA will be available for P2P loans, which means lenders will be able to shelter well over £15,000 from tax (the current ISA limit is £15,240 and this is due to rise in line with inflation next year).
Fairer treatment for peer-to-peer lenders
This is a move that Zopa has long been pushing for: in our view, it is only fair that P2P is treated in the same way as bank savings and stock-market investments when it comes to the tax system.
Giles Andrews, Zopa CEO and co-founder, welcomed the Treasury’s plan, which emerged as part of George Osborne’s summer Budget. Andrews said: “Today’s announcement confirming a third ISA category, the Innovative Finance ISA dedicated to peer-to-peer lending, is a game changer for millions of Brits who have suffered from poor returns since the financial crash. It signals that P2P lending has become a mainstream way for people to invest for their futures.”
The onward march of alternative finance
Andrews added that this would be a significant boost to the popularity of P2P platforms.
“We are pleased to see that the Chancellor is open to services like Zopa, allowing consumers to side-step the banks for higher returns,” he said. “With cash ISA rates from banks at rock bottom, this new Innovative Finance ISA will, I believe, provide reliable, predictable and low-risk tax-free returns that will beat most other asset classes. We expect huge demand for this new type of ISA and see P2P lending through Zopa becoming one of UK’s most popular ways to grow your money.”
Financial benefits for the peer-to-peer lender
The Innovative Finance ISA will be introduced at the same time as the new personal savings allowance, which will allow individuals to receive up to £1,000 in savings or loan interest without being liable for income tax.
The advantage of an ISA, however, will be that a substantial holding can be built up over the course of several years and any interest will remain tax-free. Take the example of someone with £30,000 in a P2P loan earning 5% a year after fees and bad debts: they would receive £1,500 in annual interest.
If this was held outside an ISA, £500 of that would be subject to income tax after next April; inside an Innovative Finance ISA, on the other hand, the whole amount would be tax-free. (By maximising your ISA allowance, you would be able to reach £30,000 by April 2017.)
The government said that it had considered making P2P loans available for Junior ISA or Child Trust Fund holdings, but decided against it. This is because CTFs can only hold one type of account (at present savings or stock-market linked), and ministers think that P2P loans would prove too difficult to transfer – this would effectively “lock in” Child Trust Fund holders to a single type of investment, they said.