As part of a budget that the Chancellor described as one for the ‘makers, doers and savers’ George Osborne announced that peer to peer lending could be included in tax-free Individual Savings Accounts (ISAs) within twelve months.
How this new and exciting announcement will actually play out in the markets is still uncertain, but among several suggestions put forward by those in the industry is a new type of ISA – specifically designed to hold peer to peer products.
It seems that the Chancellor has finally acceded to the demands of thousands of savers and investors in the UK by allowing peer to peer products to be given ISA status for the very first time. But what does this mean for the nation’s savers?
The proposed rules – although a little vague at the moment – mean consumers will have the opportunity to invest through peer to peer schemes and avoid paying tax on any gains. And because the Chancellor also announced an increase in the ISA allowance, it will be possible for savers to put up to £15,000 into their new ISA without having to pay tax on the returns.
Peer to peer lending – sometimes referred to as social lending – has been growing at an astonishing rate since the banking crash of 2008. It puts borrowers and lenders in touch with each other without the often burdensome interference of mainstream banks. The number of online services providing this facility has increased considerably during the last five years, and this latest news from the Chancellor should lead to even more peer to peer services entering the market in the coming years.
Why are peer to peer products so popular?
Both borrowers and savers have been casualties of the global economic turmoil that ensued after the banking crash of 2008. With interest rates at record lows, savers have been struggling to grow their capital in high-street savings accounts. Meanwhile, borrowers have been struggling to find affordable credit because of relatively high interest rates and tightened lending criteria. Peer to peer loans provide favourable financial solutions to both groups simultaneously.
This relatively new form of investment has so far been considered as something of a niche product, but the recognition it has received by the government now suggests that it is likely to become a integral part of the UK’s financial system for the foreseeable future.
How will this new opportunity work?
Despite the news that peer to peer products can now be included in ISA allowances, the government stopped short of providing any specific details on how this will work. Instead, there will be a lengthy and comprehensive consultation – aimed at assessing all the practical options available. It may be that stocks and shares ISAs are used, or a new peer to peer ISA could be developed within a year. There is also the possibility that existing investment platforms will offer the new ISAs. The eventual outcome may involve established peer to peer platforms – regulated by the FCA – offering specialist ISAs as part of their service.
The growing demand for low rate loans and more favourable rates of interest for savers have been the underlying reasons for the huge increase in demand for peer to peer products in recent years. Now that investors will be able to protect their gains from tax liabilities, this tax-efficient vehicle should go from strength to strength.
Lending Works is a peer-to-peer lender that matches thoroughly underwritten personal loan borrowers to shrewd lenders so both receive a much better deal. Lending Works is the first peer-to-peer lending company that protect its lenders against borrower default. For more information, please visit – www.lendingworks.co.uk