The Government has launched a consultation on how best to include peer-to-peer loans within ISAs.
George Osborne, the Chancellor of the Exchequer, announced in the Budget that he wanted it to be possible to place the investments within the tax-free wrapper an ISA offers. Now the Treasury is looking at how this could work.
What is peer-to-peer lending?
Peer-to-peer lending has grown significantly over the last couple of years, as savers look to get a better return on their money.
You lend to other individuals or businesses through the peer-to-peer site, and in return you tend to get a far better rate of interest than if you had placed it in an orthodox savings account.
For example, right now a five-year loan through RateSetter today would get you a rate of 6.1%, while you could also bag 5.7% from Lending Works or 5.2% from Zopa.
In comparison, the best mainstream five-year bond right now would only secure you 3.22% from SecureTrust Bank.
There are plenty of risks associated with that better return though. While peer-to-peer sites are now regulated, there is no protection offered by the Financial Savings Compensation Scheme as there would be with a normal savings account, should the peer-to-peer site go bust. That said, many peer-to-peer firms have contingency funds in place to help protect lenders.
By its very nature, lending to individuals and businesses is risky. There will be some borrowers who take your cash and fall behind on their repayments.
And it’s generally not easy to cash in your peer-to-peer loan if you need to get your hands on your money quickly.
For more read What is peer-to-peer lending?
Compare peer-to-peer rates with lovemoney.com
A peer-to-peer ISA
A month-long consultation will be launched on whether peer-to-peer loans should be included within existing stocks and shares ISAs, or whether a third type of ISA needs to be established to cover the loans.
According to investment company Hargreaves Lansdown, the danger of simply enveloping peer-to-peer loans within a stocks and shares ISA is that it may limit your ability to make other investments. It suggests that investors would be prevented from putting money in both a stock market investment and a peer-to-peer loan at the same time, meaning even a £500 peer-to-peer loan would stop you from being able to invest the rest of your ISA allowance in stocks and shares.
Hopefully this 'all or nothing' approach won't be taken.
The Treasury is also looking at how peer-to-peer loans could be transferred and whether they are suitable for inclusion in Junior ISAs and Child Trust Funds.
The consultation closes on 12th December.