The Innovative Finance ISA – are 12% Tax Free returns too good to be true?
For the past decade, the UK’s savers have been hit harder and harder by falling interest rates, and with the Bank of England base rate at an all-time low, savers are in desperate need of an investment which can bring in a decent return. It might just be the case that their prayers have been answered; the new “Innovative Finance” ISA could be the ideal investment vehicle for savers who want to generate a decent return.
What is the Innovative Finance ISA?
An ISA (Individual Savings Account) is a tax-free “wrapper”, which provides savers with the ability to accrue interest throughout the year without paying tax on it. There are several different types of ISA on offer; some are tailored to help people buy a first home, like the “Help to Buy” and “Lifetime” ISAs, while others are simply an effective way of sheltering savings from taxes. Anyone can save up to £15,420 in ISAs annually, and this limit is set to rise to £20,000 in April 2017.
The Innovative Finance ISA essentially provides a mechanism by which investors in P2P lending can reduce the tax they pay on interest they earn. This is great news for savers, since they’ll no longer be required to count their P2P interest income as part of their tax allowance; as long as it remains below £20,000, it’ll be tax-free.
What Does This Mean for P2P Lending?
The more attractive P2P lending is to savers, the more investment the market is going to see. Tax protection for interest earned on P2P loans could potentially represent significant savings for investors, and could well incentivise savers with large lump sums to consider investment in the P2P market.
Something which investors should be wary of though is that the FCA has been slow to approve the major P2P players (Zopa, Ratesetter, LandBay, etc) for ISA management, but has granted approval to many smaller organisations. Many of these lenders are offering exceptionally high returns (up to 12%), but don’t have the track record of stability which the more established lenders do, and often offer no compensation for bad debt or default.
Investors should choose carefully when selecting a lender, since P2P lending isn’t covered by the Financial Services Compensation Scheme, and there’s no guaranteed return of any kind.
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