In July, the new limit for Isa contributions that George Osborne announced in the Budget will come into effect, meaning that we can all put in £15,000 a year and invest it as we like in cash, stocks and shares. This latest jump in the tax-free Isa ceiling from £11,880 underscores the remarkable ascent of the Isa in the years since the financial crisis—the annual limit remained stuck at £7,000 from 1999 until April 2008, since when it has more than doubled.
It is likely that this latest boost will soon be followed by another. In his Budget speech Osborne also announced a consultation on how to allow investors to hold peer-to-peer (P2P) loans in an Isa account. P2P lending involves individuals and organisations banding together to advance loans to people and companies that are looking to borrow. The loans are assembled from dozens or hundreds of contributions via websites that bring together the two sides, check the credit-worthiness of the borrowers and take a fee for arranging the deals.
The government has been keen to encourage the growth of this form of alternative finance in order to create a wider range of places that businesses in particular can go to raise funds. Allowing private investors to protect their P2P gains from tax using the Isa wrapper represents a big step up in the level of official support for the P2P movement.
For relatively confident DIY investors, P2P offers some very interesting ways to diversify beyond the conventional range of assets. It is possible to lend to individuals, companies, renewable energy projects and property developers. Levels of security vary from personal guarantees of repayment to a registered charge on a property that can be repossessed to recover the money owed. Annual returns to lenders before tax and fees typically range from around 5 per cent into double figures, with high single-figure rates not unusual.
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For investors like me, who are already lending via P2P platforms, the opportunity to take profits tax-free is obviously welcome. The returns are very attractive in an age of rock-bottom interest rates but they inevitably come at a price—in our eagerness to get more for our money, it is all too easy to forget that a yield figure contains vital information about risk as well as returns. Removing the need to deduct tax would help to make those risks easier to bear. It would also end one of the disadvantages that individual investors—the bedrock of the P2P movement—suffer compared with organisations that lend. As things stand, corporate lenders can deduct losses on bad loans from their profits before calculating tax, while individuals cannot.
So far so good. But fitting P2P loans into the world of conventional Isa investing will be tricky. At the moment, my stocks and shares Isa is with TD Direct Investing and enables me to buy shares listed on numerous stock exchanges around the world, as well as thousands of funds from hundreds of providers.
But the only way to make a P2P loan is via a particular provider’s own marketplace—if I want to lend to small businesses via Funding Circle I have to go to Funding Circle’s website. I can’t go to TD Direct Investing, subscribe my £15,000 and decide how much of it I want to lend via Funding Circle.
Until the big Isa providers decide to include P2P loans within their wrappers, it looks as though the only way to invest tax-free in P2P loans will be to go to the particular service’s website and use its own Isa wrapper. And if that’s what happens, will I only be able to open one such Isa per year and end up having to invest tax-free via just one P2P platform?
As a DIY investor I want to be able to diversify across shares, funds and P2P loans of different sorts in one account. Until the P2P industry can find a way to make that happen, it’s not going to take off.
