Earlier this week George Osborne, Chancellor of the Exchequer, took his story up to Parliament to share his view of the UK economy and his strategic vision going forward. The speech was broadly well-received, and as politicians typically do, there was something for everyone including a tax consultation on newspapers (to help the jurassic industry maintain relevance) and cutting beer duty for the third year in a row.
Beyond these popular initiatives, Osborne does have something to tout as the UK economy has differentiated itself from the rest of Europe, and much of the world, as it has grown respectably aided by common sense policies of lower taxes and lighter regulations.
The UK government has consistently advocated for new forms of finance. Peer to peer lending has benefited by not only sensible regulations but partnerships with the British Business Bank.
Last year it was announced that P2P loans would be allowed to be held in ISA’s (or Lending Investment Savings Accounts – LISAs). P2P industry leaders view this inclusion as a seminal event that will boost supply for their direct lending platforms. Final guidelines are expected “soon” but there exists other encouraging information including the fact that Treasury has confirmed that the first £1000 of interest earned through P2P Lending will now be tax free. Higher wage earners (those who pay taxes at a 40% rate) may receive a break of £500. Earners making £150,000 / year or more will not be able to take advantage of the tax break. This is another huge benefit for the vast majority of UK P2P lenders, and is viewed as a major part of the Budgets’ new tax break on savings,
“It’s fantastic news that The Treasury has confirmed the new savings tax break will also apply to interest earned from P2P lending. The news is very exciting as the vast majority of Zopa’s 58,000 lenders can now lend tax free from April. I expect this will be a huge boost to the industry and will attract a large number of new consumers to start lending and earn returns of 5+% tax free.”
Treasury carried out its original consultation ‘ISA qualifying investments: consultation on including peer-to-peer loans’ during the end of last year. Of course the challenges are in the details with many in the industry promoting a new “Lending Investment Savings Account”. According to the FT, savers may be eligible for a solid “£200 annual windfall” because of the new tax break which will commence this April.
Another positive for the P2P industry is that beginning in April of 2016 investors in P2P loans will be able to offset losses against gains in their taxes.
A recent survey conducted by the P2PFA indicates that 74% of peer-to-peer lenders like the idea of a separate lending ISA and 81% believe a “Lending ISA” (LISA) is the way to go thus separating it from traditional cash, stocks & equity ISAs. With over 23 million UK citizens holding ISA accounts today the gain for P2P sites could be significant.
According to the recent study by Cambridge University more than € 1.75 billion was lent via peer to peer lenders in the UK during 2014. During the last few years P2P business lending has grown at a rate of 253% and consumer lending at a rate of 113%. ISA inclusion should bring an avalanche of funds powered in part by the low interest rate environment for savers.
“LISAs would offer a much needed middle ground between low yield cash and high risk investments, opening up choice for consumers, reinvigorating a tired ISA market and allowing a higher return on their investments,” said Rhydian Lewis, CEO and founder of RateSetter.
While incorporating P2P assets in ISA’s is a positive for both platforms and investors, these assets are not risk free. Fortunately to date – defaults have remained quite low and there have been no reported occurrences of fraud.