What are peer-to-peer ISAs?

“I was listening to the Budget in March and the Chancellor mentioned something about peer-to-peer ISAs.  It sounded like this was something that could bring a better return than a cash ISA.  Can you explain what’s involved please?

peer-to-peer-ISAs

Peer-to-peer lending has been available for some time, but the proposal to allow it in an ISA investment is new.  If the proposal goes ahead, it will be allowed from April 2015.

In essence, peer-to-peer ISAs allow you to lend money to an individual or a business and the interest on the loan is tax-free.  But that doesn’t mean you can simply lend money to your next-door neighbour or work colleague and forget about declaring any interest they pay you:  the peer-to-peer loan must be a formal arrangement via an approved platform. The Chancellor likes the idea as it will give businesses a new way to source capital.

“Peer-to-peer lending has been available for some time, but the proposal to allow it in an ISA investment is new.  If the proposal goes ahead, it will be allowed from April 2015”

Normally web based, the arrangement works by linking those with spare cash with those who need to borrow.  Rates of return can indeed be better than a cash ISA, BUT there is a significant risk that the borrower may fail to maintain their repayments.

Some of the web platforms that offer the matching service also offer a provision fund that will cover bad debts while others recommend that you spread your investment over multiple borrowers to minimise your risk.

The government is likely to carefully control the type of investment that can go into a peer-to-peer ISA, only allowing established businesses with good debt reputations to participate – but there will still be a significant risk.

The peer-to-peer lending sector has now come under the regulatory umbrella of the Financial Conduct Authority.  However, any money invested in this type of ISA will not be covered by the Financial Services Compensation Scheme (which protects up to £85,000 per person per bank institution).

Peer-to-peer ISAs remain a specialised product and not suitable for everyone.  I would recommend that you wait until next April to find out the exact nature of what the Chancellor is proposing – and then talk it through with an independent financial adviser before going down that route.

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NB. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

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About the author

Carl Lamb Founder and Managing Director of Almary Green Investments Ltd, Carl is passionate about delivering a quality service to clients.

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