For relatively confident DIY investors, P2P offers some very interesting ways to diversify beyond the conventional range of assetsby Andy Davis / June 19, 2014 / Leave a comment
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…