From April 2016, interest and gains made through peer to peer loans on peer lending platforms will qualify for tax advantages where these loans are made through the new form of the ISA, the Innovative Finance ISA.
The idea is to increase choice and flexibility available to ISA investors whilst also improving competition in the banking sector by diversifying the available sources of finance.
Whilst peer to peer lending is not a new concept, indeed it has been around for about ten years now, it will become more attractive with some ISA providers offering expected returns of between 6 and 8% which is clearly much higher than available through high street banks. It is important though that investors are comfortable with the different profile this investment has in comparison to the Cash ISA, particularly concerning the relationship between risk and reward.
The idea of peer to peer lending is to provide someone who is looking to invest their money with access to people who are looking to borrow money via an online platform. This allows savers to receive better interest on their savings whilst also allowing borrowers to pay less in interest on the amount they are borrowing. This may sound high risk but in practice, the main peer to peer lending websites do carry out rigorous checks to make sure the lending is safe as well as spreading the investment across a large number of borrowers, therefore minimising the risk.
So is investing in an Innovative ISA a good idea? Well, giving an investor more options to invest in a tax efficient manner is definitely a good thing. However, we at Blue Sky always say to clients that if you are planning to invest, don’t; invest in planning first. This will ensure that the investments you use are not only right for your circumstances, but also that you are not taking more risk than you need to.
Contact us if you would like to discuss this in more detail.
