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The Innovative Finance ISA
Since its introduction in the 2015 Budget by then-Chancellor George Osborne, the Innovative Finance ISA (IFISA) has launched and is now available to investors. It has the same individual allowance as Cash and Stocks & Shares ISAs of £15,240 per person per financial year and allows individuals to use some or all of this amount to be invested in peer to peer (P2P) lending.
Only FCA-authorised peer-to-peer platforms are able to offer the Innovative Finance ISA and LendingCrowd became one of the first platforms to receive full authorisation in November 2016. Following this we will launch The LendingCrowd ISA in early 2017 so that our investors can take advantage of the tax free returns available.
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How will the IFISA work?
From 6th April 2016, ISA investors have been able to deposit money into this so-called ‘P2P ISA’ or transfer money held in other ISA accounts over to P2P investment platforms. This allows lenders to enjoy tax-free interest earned when lending their funds to borrowers, which in LendingCrowd’s case are growing small and medium sized businesses. While many P2P platforms have expressed interest in offering an IFISA to investors, most are yet to be awarded full FCA authorisation.
If that wasn’t good enough news for investors launched at the same time as the IFISA is the new personal savings allowance which means individuals will be able to receive up to £1,000 in savings or loan interest without being liable for tax.
What are the regulations?
After announcing the launch of the IFISA, the Government consulted on the rules for it. Regulations around the IFISA are largely similar to what came before: it is available to UK taxpayers aged 18 or over and in addition to personal, property and small business loans this wrapper can include other forms of debt-based finance such as bonds and debentures. However, equity-based crowdfunding has not been included as an eligible form of alternative finance for the Innovative Finance ISA.
It is important to remember the £15,240 allowance applies to the money loaned through a P2P platform and not the interest from these investments. If not used, this allowance cannot be ‘rolled over’ into the following tax year and you are only permitted to hold one IFISA account each period. It should also be noted that unlike the cash ISA, investments in the IFISA will not be protected by the Financial Services Compensation Scheme.
The LendingCrowd Innovative Finance ISA
Launching in early 2017, the LendingCrowd ISA will allow you to use all or part of your annual £15,240 ISA allowance on your P2P investments. Therefore, this will allow investors to receive tax-free interest and tax-free capital repayments on funds lent through LendingCrowd.
If you have existing investments with LendingCrowd, these cannot be directly transferred into an ISA account due to regulatory restrictions.
This latest development is an exciting step for investors who can now combine the potentially higher returns of P2P with the same tax efficiency that other investment classes have long been able to enjoy.
Other news for the Alternative Finance sector
Bad debt relief for the Peer-to-Peer industry: This was announced in the Chancellor’s 2014 Autumn Statement, and will allow tax relief on bad debts incurred on P2P loans against other P2P income. Draft legislation on this will be published later in 2015 for introduction in April 2016. It is expected that P2P lenders who suffer bad debts on P2P loans between 6 April 2015 and 5 April 2016 will be able to claim relief in their 2015 tax returns.
Peer-to-peer withholding tax: The 2014 Autumn Statement also proposed new rules on withholding tax applied on P2P loans that it is expected will take effect from April 2017. A consultation on these proposals took place between July and September 2015 with the outcome yet to be announced.
Competition in SME lending: Final legislation will also be introduced on 2 reforms which will have significant effects on the SME lending market. The first of these requires major banks to share credit information about their SME customers with other finance providers through Credit Reference Agencies. The second requires that when these banks reject an SME for finance, they offer the SME the opportunity to be referred to a finance platform that could help link them with alternative lenders.