Is 2018 the Year of the Innovative Finance ISA?
2017 was a big year for peer-to-peer lending platforms, with the industry as a whole attracting millions in new investment.
Many areas experienced enormous growth, and the last 12 months have really managed to put P2P lending into the mainstream consciousness. Last year also saw the introduction of what many consider the “legitimisation” of peer-to-peer platforms by the Financial Conduct Authority, as it approved several lenders to offer ISA products. The so-called “Innovative Finance” ISA, or “IFISA”, was not taken up in huge numbers in 2017, but there are signs that this will improve going forwards.
What’s the appeal of an IFISA?
Until now, earnings accrued through peer-to-peer lending platforms have been subject to tax after the first £1,000 (or £500 if you’re a higher-rate taxpayer). This has proven a difficult obstacle for many investors, who can make use of the £20,000 ISA limit to generate savings without incurring tax penalties. Despite the fact that P2P platforms offer much more attractive interest rates than high street banks, the additional exposure to taxation is enough to put some would-be investors off peer-to-peer lending.
However, with the introduction of a dedicated “tax wrapper” specifically for the innovative finance sector, many platforms are hoping to see an influx of new money into the marketplace. In fact, Lending Works, one of the first platforms to offer an IFISA product, was inundated with investors; £1.5m was deposited in IFISAs within just 24 hours, leading to a severe lender/borrower imbalance and the temporary suspension of their products.
Why are IFISAs on the rise now?
IFISAs were fairly hard to come by in 2017, but now all of the “big three” peer-to-peer platforms, RateSetter, Funding Circle and Zopa, are offering dedicated tax efficient products. Between them, these lenders have a combined loan book in excess of £8.5 billion, which means they’re well-placed to introduce their ISA products to a large number of savers. As the IFISA becomes more and more mainstream it’s likely to continue the disruptive trend that peer-to-peer lending has created in recent years, pulling savers away from the low rates that banks offer and driving ever more investment in the innovative finance sector.
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