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The new Innovative Finance ISA - Tax-free P2P investing is just three months away!

The new Innovative Finance ISA - Tax-free P2P investing is just three months away!

The game-changer: the impending Innovative Finance ISA (IFISA)

The big game-changer for P2P investors came with the Chancellor's announcement that British investors would be allowed to hold "crowd-funded debt-based securities" inside tax-free ISAs (Individual Savings Accounts). This followed a one-month consultation period from October 2014 on how such a "P2P ISA" could be best designed.

In his Summer Budget of 8 July 2015, George Osborne announced that, following this consultation with the public and the P2P industry, he had decided against allowing P2P loans to be held inside already well-established Stocks & Shares ISAs. Instead, in November, the Chancellor unveiled plans to create an entirely new ISA, now named the Innovative Finance ISA (IFISA).

From 6 April 2016, the start of the 2016/17 tax year, UK investors will be able to buy and own P2P loans inside the tax-free wrapper of an IFISA. The great news for fans of P2P lending is that they will now be able to invest up to the maximum ISA limit (£15,240 in the 2015/16 tax year) into P2P loans.

A bumper boost to P2P interest income

Thanks to the tax-free status of the IFISA, all interest income earned inside this tax shelter will be free of UK income tax in just three months.

Of all the Chancellor's proposed changes to P2P regulation, this is surely the biggest improvement. That's because being able to earn tax-free P2P interest income inside an IFISA will dramatically boost investors' returns, as this table demonstrates:

Usual tax rate Tax-free boost
to returns
inside an IFISA
20% 25.0%
40% 66.7%
45% 81.8%

As you can see, for basic-rate (20%) taxpayers, investing in P2P loans inside an IFISA delivers a 25% increase to their returns, boosting their net (after-tax) returns by a quarter. In other words, instead of earning, say £80 in taxed P2P interest; they can boost this figure to £100 simply by holding these P2P loans inside an IFISA.

For higher-rate (40%) taxpayers, this boost to their returns is a handsome two-thirds (66.7%). For additional-rate (45%) taxpayers, the tax-free gain from an IFISA leaps to an amazing boost of 81.8%, worth an extra nine-elevenths in additional interest to the highest earners.

More diversification, flexibility and choice for ISA investors

With the Bank of England's base rate held at 0.5% a year since March 2009, UK savings rates have plumbed record lows. Indeed, with savings rates at rock bottom, British investors struggle to earn more than, say, 2% a year, even in table-topping deposit accounts.

Likewise, investors in UK equities (shares) had a pretty disappointing 2015, The blue-chip FTSE 100 index ('the Footsie') fell by 4.9% (excluding dividends) last year, in its worst yearly performance since 2011.

Another bonus is that, since its creation in 2015, P2P lending has shown little, if any, correlation with equity returns over the past decade or so. Therefore, allowing British investors to hold P2P loans inside tax-free ISAs will enable them to strengthen and diversify their existing investment portfolios.

The April revolution

Of course, the launch of the IFISA -- which arrives in less than three months' time -- is likely to lead a huge boost to the UK's already-blossoming P2P industry. What’s more, it's also sure to increase access to funding for SMEs (small- and medium-sized enterprises). By boosting SMEs, which are the very foundation of British business, increased P2P lending via IFISAs will also benefit the UK economy by helping smaller firms to grow and expand.

In short, we at Assetz Capital think that the new, separate Innovative Finance ISA (IFISA) is set to be the best thing ever to happen to UK P2P lending.

Summing up, Stuart Law, co-founder and CEO of Assetz Capital, enthusiastically adds,

"We think the introduction of the new IFISA in April is a terrific tonic for fed-up, stressed British investors. Having a separate ISA especially designed for P2P loans and other crowd-funded investments shows this government is committed to supporting and expanding peer-to-peer lending. What's more, the boost to investors' returns ends an outdated 'tax trap' that has unfairly held back our industry. With the launch of the IFISA, UK P2P lending is all set for a radical revolution in April!"

WEALTH WARNING: "As with most forms of investment, peer-to-peer lending carries a degree of risk to your capital; in this case, if borrowers were unable to repay their loans. At Assetz Capital, we seek to reduce this risk to our investors by taking asset security on every loan, with the added benefit of a discretionary Provision Fund for some of our investment accounts."

- February 8, 2016

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