George Osborne, the Chancellor of the Exchequer, announced his intention to bring peer-to-peer into the ISA umbrella in last year’s Budget, but there was no mention of it in this year’s speech.
So how close are we to getting a peer-to-peer ISA? And what will it look like?
Consulting on peer-to-peer
Last year the Government launched a consultation into exactly how it could bring peer-to-peer lending into an ISA. As we explained in Government considers launching dedicated peer-to-peer ISA, the consultation looked at the various options for making peer-to-peer returns tax free, from including it within stocks & shares ISAs, to launching its own, separate form of ISA.
That consultation closed in mid-December, but as the Budget documents reveal, the full response to that consultation won’t be published until this summer.
That’s disappointing as it means a further delay before peer-to-peer lenders can enjoy tax-free returns.
Tax-free lending from April 2016
However, another announcement in the Budget means this will probably not be a big issue for many peer-to-peer lenders, from next year anyway. George Osborne revealed that, from April 2016, the first £1,000 in savings interest any of us earn will be free of tax.
[SPOTLIGHT]It’s now been confirmed that this tax break also applies to peer-to-peer lending, so for the vast majority of peer-to-peer lenders the ISA status of their lending becomes somewhat irrelevant – ISA or not, their interest returns will be out of the taxman’s clutches.
Why peer-to-peer is thriving
According to figures from the Peer-to-Peer Finance Association trade body, in the fourth quarter of 2014 the total amount lent out through peer-to-peer loans was over £2.1 billion. That’s compared to £947 million at the same point in 2013, and just £407 million in the last quarter of 2012.
The huge growth last year is, in my view, down to a number of things. Firstly, the most obvious reason is that peer-to-peer continues to offer savers a far better return than sticking their money in a bank.
Now compare that to five-year fixed rate savings bonds, where the best rate you’ll get from a traditional bank is 3% from Shawbrook or Close Brothers.
Of course, with peer-to-peer there is an element of risk involved. Traditional banks have the safety net of the Financial Services Compensation Scheme (FSCS), which means the first £85,000 you save with any institution is absolutely safe, even if that firm goes bust.
Which brings me to the second reason that I think peer-to-peer has thrived so much over the last year – it seems a much safer bet than before.
No, there isn’t a peer-to-peer FSCS. But the combination of the provision funds all of the big boys employ, which will kick in if those people you lend to fall behind on their repayments, and the fact that last year the Financial Conduct Authority began regulating the industry has, in my view, made the whole practice seem a lot safer and more legitimate. Having the Chancellor talk about peer-to-peer in his Budget speech last year has probably added some further credibility too.
That’s only likely to increase further when we eventually get our peer-to-peer ISAs. It's just a shame that we still have a while to wait before we know what they will even look like.